Executives: Chris Meyer - IR Liz Smith - CEO Dave Deno -

CFO
Analysts: Michael Gallo - CL King Jason West - Credit Suisse Matthew DiFrisco - Guggenheim Securities Joe Buckley - Bank of America Merrill Lynch John Glass - Morgan Stanley Jeff Farmer - Wells Fargo Karen Holthouse - Goldman Sachs John Ivankoe - JPMorgan Andrew Strelzik - BMO Capital Markets Jeffrey Bernstein -

Barclays
Operator: Greetings and welcome to the Bloomin' Brands' Fiscal Third 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: 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 third 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 may be 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'd 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 conference call, we will provide a recap of our financial performance for the fiscal third quarter 2016, an overview of Company highlights, a discussion regarding progress on key strategic objectives, an updated 2016 financial outlook and preliminary thoughts on 2017. Once we've completed these remarks, we'll open up the call for questions.

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 third quarter diluted earnings per share was $0.20, up 33% from last year. This result was in line with our expectations and we continue to make the necessary investments in our core guest experience to restore higher quality traffic growth over the medium to long term. In Q3, U.S.

comps were down 0.7% and traffic was softer than we anticipated. As we've previously discussed, we are reducing our allocation of dollars against traditional discounting and redirecting those dollars towards innovating and differentiating the core experience. As a result, we saw a migration towards healthier traffic, as evidenced by an increased check average, which helps profitability. However, we are also experiencing continued competitive activity that has put additional pressure on CDR traffic, including discounting, increasing restaurant capacity, and the improving relative value and availability of eating meals at home. That said, casual dining still represents an $80 billion category and for brands to consistently provide a great guest experience, there remains a significant opportunity to take share.

For us, this means our ongoing investments are prioritized to elevate the total 360 degree experience. In the short term, industry headwinds are pressuring traffic growth. While we are certain that we are making the right investments to restore healthy traffic, it is clear that they will take longer to manifest in this environment. This is particularly true given that we are being disciplined about the level of discounting activity that we engage in. We will remain competitive and provide value to our consumer in this environment.

However, we will not overspend in the short term to boost traffic. As it relates to Outback, Q3 traffic was below our expectations, but we remain confident in the strategic direction we are taking the brand. We have made a number of investments over the past several months to enhance the core guest experience. These include the launch of the new center cut sirloin, increases in portion sizes, as well as investing dollars into the labor model during peak hours to improve the experience for our guests. We also see an opportunity to further enhance the guest experience.

In November, we will be simplifying the menu with a reduction of 19 menu items that will result in reduced complexity, improved execution of the fundamentals, and stronger customer satisfaction. This will be complemented with additional process improvements and enhanced service SKUs that will streamline our execution and increase sales. In addition to our simplification efforts, we continue to aggressively roll out the Outback exterior remodel program. We expect to complete 150 renovations in 2016 with over 50% to be completed in the fourth quarter. The design contemporizes our restaurants with improved curb appeal and has driven 4% to 5% sales growth in these locations.

Although we anticipate our investments to return Outback to growth over the long term, we will augment our strategy with brand appropriate, value oriented offers to address the short term realities of this environment. These value promotions will be executed in a brand differentiated and ownable way beyond straight discounting. As an example, this week, we introduced Walkabout Wednesday, a new platform that features our center cut sirloin at a compelling valued to support trial. After five years of strong performance and share growth, Outback has been challenged over the past 12 months. However, this is a strong brand with high brand regard and a loyal following.

We are taking the right steps and investing in new sales leverage that will enable the next cycle of sustainable growth for this brand. This is a dynamic that we have seen play out at Bonefish. Over the past year at Bonefish, we have reduced our reliance on discounting, simplified the menu, upgraded quality, and returned to our polished casual roots of fresh grilled fish and superior service. Although the reduced discounting had a negative impact on traffic in the short-term, it showed up quickly in strength and brand satisfaction, which is beginning to result in the return of healthy sales growth. In Q3, Bonefish posted their second consecutive quarter of positive comp sales and, importantly, the brand is on track to deliver its most profitable year ever in 2016.

Now I would like to turn to two exciting opportunities within our portfolio, the newly introduced Dine Rewards program and the promising off-premise dining occasion. Dine Rewards is our first multi-brand loyalty program. Since its launch on July 19, it has consistently 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. 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.

We now have over 1.6 million members enrolled. We also see significant opportunity in increasing off-premise dining occasions for our brand. People want convenience and they want CDR food quality but not always in the restaurant. Our own research suggests this is a sizable and incremental sales layer. We will strike the right balance between being prudent and aggressive in our approach to capture this emerging opportunity.

We are testing the most effective go-to-market strategy for off-premise. Importantly, we've already built the capabilities and added talent to our organization that will enable us to move this initiative forward. Turning now to the international business, Brazil continues to be resilient in a tough environment and posted comps of 7.3% with traffic growth of 1.4%. The Outback restaurants are performing in line with our high expectations, and we are on track to have over 80 restaurants by year end. In addition to Outback, we are seeing success with Abbraccio.

We now have seven restaurants open and sales have been similar to new Outback. This gives us conviction in the potential for Abbraccio. 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. China also represents an important long-term opportunity. We are seeing meaningful sales gains and continue to be profitable at the restaurant level for the first time.

This validates our consumer appeal and puts us in a position to accelerate expansion. We have six restaurants open and will have a seventh by the end of the year. Our international growth strategy is also focused on complementing our ownership position in high growth markets by partnering with experienced local franchisees to develop our brands in non-core markets. As an example, we recently signed a development agreement with our existing franchisee in Australia to open 20 restaurants over the next three years. This comes after the announcement last quarter of a multi-country agreement that we have reached with two partners in the Middle East to open 26 franchise restaurants.

In addition, we are in discussions for other transactions that will expand our presence in major markets. This progress reflects the portability, relevance and attractiveness of our leading brands. 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. Since the beginning of the third quarter, we sold a total of 101 properties for $350 million.

The real estate market remains attractive, and we will balance speed and value through bulk and individual transactions as we expect to largely complete the process by early next year. As a result of these sale-leaseback transactions, we have paid down over $320 million on our bridge loan so far this year. In addition, we repurchased $135 million worth of stock in the quarter. These are just two aspects of the overall strategy to increase total shareholder return. In summary, our top priority is restoring sales growth in the U.S.

While the third quarter was softer than expected, we took significant steps to elevate the core guest experience, and we will be patient and allow these efforts to gain traction. We are confident that this is the right area of focus and we'll return the domestic portfolio to healthy growth. And with that, I'll turn the call over to Dave Deno to provide more detail on Q3 and 2016 guidance. Dave?

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

As a reminder, when I speak to results, I'll be referring to adjusted numbers that exclude 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 provide a discussion of the nature of each adjustment. With that in mind, our third-quarter financial results versus the prior year are as follows.

GAAP diluted earnings per share for the quarter was $0.18 versus $0.13 in 2015. Adjusted diluted earnings per share was $0.20 versus $0.15 last year. The primary difference between our GAAP and adjusted numbers in the third quarter was due to certain impairment charges and certain items related to our relocation and remodeling initiative as well as the sale of South Korea. Total revenue decreased 2.1% to $1 billion. This decrease was driven primarily by the sale of our Outback business in South Korea.

This was partially offset by the net benefit of restaurant openings and closures. Adjusted restaurant level margin was 14.4% this year versus 14.5% a year ago. The slight decline was driven primarily by wage inflation, service and product enhancements at Outback, and operating expense inflation. These items were partially offset by the benefit of increases in average check and productivity savings. It is also important to note that embedded in our Q3 restaurant margin is approximately $5 million of investments to enhance the guest experience, including the launch of new center cut sirloin and service model enhancements 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 in prior calls. As a reminder, we are not raising prices to cover these investments. As it relates to G&A, after removing all adjustments from Q3 2016 and Q3 2015, general and administrative costs were $64 million and $67.5 million, respectively. Outside of key investment areas such as international off-premise, we remain committed to zero overhead growth in G&A and will always look to continue to operate more efficiently. Turning to reporting segments, international adjusted restaurant margin was up 20 basis points to 18.3% in Q3 versus last year.

This was partially driven from the sale of Korea as we removed the high relative labor costs in South Korea from our results. As we grow key equity markets internationally, our consolidated margins will benefit from the success of overseas investment. We also expect to leverage an increasingly growing franchise base. As Liz mentioned, we are aggressively pursuing franchise development in noncore markets. The recent deals in Australia and the Middle East highlight the attractiveness of our brand.

On the development front, we opened 10 system wide locations in the third quarter consisting of one Company owned Outback location, one Fleming's location, and eight Company owned international locations, including three Outback and two Abbraccio restaurants in Brazil. As we have discussed in prior calls, we continue to monetize our owned real estate. Since the beginning of the third quarter, we sold a total of 101 properties for $350 million. For the year, we have sold a total of 147 properties for $514 million. Going forward, we currently have approximately 65 owned properties remaining to be considered for the sale leaseback.

Given this great progress, we remain confident that we can substantially complete the sale of the remaining properties by early 2017. The attractive real estate environment combined with the high level of demand for these properties will unlock significant value for shareholders once the expected transactions are completed. First, it enables us to do lever our balance sheet as we pay off the bridge loan, and second, we are using access sale leaseback proceeds to repurchase shares. As it relates to our 2016 full year results, we expect the overall financial benefit of the sale leaseback strategy to be limited, given the timing of the transaction. We expect most of the benefit to come in 2017.

Turning to our capital structure, we repurchased $135 million of stock in the third quarter. This leaves $165 million remaining on the existing $300 million authorization which expires in January of 2018. 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 October, the Board of Directors declared a cash dividend of $0.07 a share payable on November 22. I would now like to take you through some thoughts on 2016.

We 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 negative 1% to 1.5% versus previous guidance of flat. Given our Q3 performance and persistent industry headwinds, we believe it is prudent to reflect this in the full year outlook. However, we do remain committed and confident in the investments we are making across the portfolio to improve sales and expect them to build overtime.

We now expect adjusted EPS to be between $1.30 and $1.35 for the year. This is a change from previous expectations of at least $1.35. The revised guidance reflects our updated comp sales assumptions and a belief that prudence is warranted in this challenging CDR environment. We expect adjusted operating margin to be lower year over year. This change is driven by the revision the comp sales as well as the increases in rent from the sale leaseback transaction.

We expect the impact from sale leaseback transactions to represent approximately a 20 basis point headwind to margins this year. Based on the forward curve, we expect foreign exchange to represent a $3 million headwind for the year. This is in line with expectations from our last call. While we are hopeful that the recent appreciation of the Brazilian real will continue, we remain cautious due to the volatile macro and political environment. We expect our adjusted tax rate to be 23% to 24%.

This is less than our original guidance driven by a forecasted production in pretax income in the United States. Our original guidance on commodities, CapEx and new restaurants remain unchanged. In terms of productivity initiatives, we are in excellent shape to deliver on our goal of at least $50 million productivity savings in 2016 with cost of sales representing approximately 50% of the overall benefit. I would now like to take you through some preliminary thoughts on 2017. First, 2017 will contain a 53rd week.

When we provide EPS expectations in February, will provide additional context on this number as well as a comparable calendar growth rate for the Company. Second, we expect to incur an incremental $9 million of expense related to regulations enacted by the Department of Labor that raises the salary threshold for employees exempted from overtime. These regulations go into effect on December 1, 2016. And finally, commodity inflation is expected to be flat to down approximately 1%. We will provide detailed 2017 guidance on our fourth-quarter earnings call in February of 2017.

Finally, one last important item. Our group Vice President of Finance and Investor Relations, Chris Meyer, will be taking on additional responsibility within our finance function and is transitioning out of the role of Investment Relations Officer. Many of you know and have interacted with Chris as he has worked closely with investors and analysts since 2013. Mark Graff will now be leading our Investor Relations function. Mark has been with the Company for five years serving in various business development and finance capacities, most recently leading our corporate planning function.

We are confident Mark will pick right up where Chris left off and we won't miss a beat in our interaction with capital markets. We wish Chris and Mark the best in their new roles. 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 increased flexibility to return cash to shareholders.

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

Operator: [Operator Instructions]. Our first question comes from Michael Gallo of CL King.

Michael Gallo: My question is on the reduction of discounting. I know you've been doing it for a number of quarters at Outback.

Obviously, you went through that last year at Bonefish. I was wondering, given the environment, obviously it's gotten a lot more competitive. Discounting has picked up industry wide, whether that's something you think you can stick to or whether you better balance it. And how do you better balance traffic, which has obviously been difficult all year? Thanks.

Liz Smith: Great.

So in terms of the reduction of discounting, you're absolutely right. We kind of had that playbook on Bonefish. And I'd just start there in saying it really unfolded as we had hoped. While it was painful in the short-term while some of that heavy promotional traffic came out, you saw a return to healthy traffic and it manifested itself with improving trends as well as higher PPA and customer satisfaction scores at an all-time high. With Outback, we really talk about how, over the last year, we felt like we had over allocated towards discounting and price promotion relative to what customers want from us, which is a total 360 degree customer experience and investment in that.

And so we started to pivot away really in earnest last quarter when we launched the center cut sirloin. So Q2 and Q3, we started to pivot away, not completely shift. So I want to be clear that it's a reallocation of some of those straight discounting dollars into elevating the core experience, which we know will provide for stickier, more loyal traffic. We are seeing it also show up in our customer satisfaction levels very similar to it did on Bonefish. So that is kind of tracking along.

I do want to be clear though. It is a very competitive environment. And everyone has talked about the number of different headwinds chasing the category. And we are going to continue to be nimble and agile. Price promotion and interesting promotions will always be part of the value equation.

We think we over allocated to it. So we feel good about the reduction and the reallocation. We know that that will result in healthier traffic, but we are going to be mindful of the competitive environment. And I think you just saw us come out with a promotion this week, Walkabout Wednesday, which had a kind of three course meal available at a very attractive price point that would encourage trial of the center cut. We are also going to be out there with interesting offers, but we're going to be executing value in a more brand appropriated, differentiated and ownable way versus call it straight couponing and discounting.

So I just want to make sure that's clear on that front.

Michael Gallo: Just as a follow-up to that, can you parse out what you saw in terms traffic trends, lunch versus dinner? Obviously, you were pretty heavily promoting lunch last year.

Liz Smith: Sure. So, we don't break out the lunch/dinner anymore because it's been well anniversaried over a couple of years. But what I will say is that we saw more challenged traffic at dinner than we did at lunch.

And I think that really has a lot more to do with what's going on in the competitive environment. We have a larger percentage of our portfolio at dinner, and you have a lot of competition and headwind in that area in that space. Right, so you have the same things that everyone else is facing, which is increasing capacity. You see the kind of confidence gap in Boomers, which really represent of large number of our consumers in CDR. And that is showing up in a wait-and-see and a lot of negative rhetoric with this election year around the economy that kind of has people a little bit tentative, and that is showing up more in the dinner segment for us.

The other thing is that we are also looking at it's not just our competitors in CDR. It's the broader competitive landscape that seems to be frothier at dinner. So what do I mean by that? Well, you have the largest value gap versus grocery because of deflationary pressures at grocery that you've had 2009. That puts pressure on the dinner business because the meal that people cook at-home is dinner. The other thing is you're seeing a lot more availability of at-home dining dinner options, whether its third-party kits delivered to the home, grocery meals to be taken homes and assembled, or delivery options, and that tends to pressure the dinner business more.

While that's a short-term headwind, it's a long-term opportunity for us as we are building out our off-premise capability and delivery. So for us, you see it was a tougher traffic environment on dinner than it was for lunch.

Michael Gallo: Thanks very much.

Operator: Our next question comes from Jason West of Credit Suisse.

Jason West: I guess just a couple of questions related to the outlook for beef prices.

I know if, you look at the cattle futures, it looks like they're heading down quite a bit next year. I'm just wondering if you guys are capturing some big savings on beef in your guidance for food deflation or is that number just kind of a preliminary, it's not locked in yet? And then around that dynamic, do you feel like the decline in beef prices will have more of a notable impact on companies that sell steak as a consumer kind of sees that as a high cost protein that maybe that would transition them back to the grocery store a bit more than maybe other more balanced categories? I'm just wondering your thoughts on how that may impact the business into next year on both costs and sales?

Dave Deno: On the commodity side, we have -- the guidance we provide for next year is in pretty good shape. A couple of things I'll remind everybody. We do think we can capture some of the beef upside, but we do have a relatively large seafood mix in our portfolio, and seafood and fish have been a bit more challenged, so that reflects that. And then, number two, as the overall corporate guidance and as international becomes a more important part of our portfolio, especially Brazil, we do face commodity cost increases there because the general inflation is higher.

So that's contained in our overall outlook that I gave you of 0% to negative 1% for next year. So, we expect, again, a good beef market, seafood and fish a bit challenged and then international being more inflationary.

Liz Smith: Yes. And let me give my perspective on the second part of that question, which is the value gap between grocery and retail as it relates to steak being wide. We think that it's more important -- and we started this pivot, as you know, in May with the launch.

It's more important now than ever to continue to elevate the customer experience in the restaurant. So that's why our focus and our investment has been about driving that experience in the restaurant that you can't get at home. We've reallocated our investments, to some degree, towards quality portion upgrades, service investments at peak hours, signature service elements that will be coming to bear, signature items that will be coming to bear. The ambience, you see our exterior remodels still performing very well. And loyalty.

So I think it's about really making sure that you are delivering that energy in the box that makes it a go-to place, and that has been our real focus. We agree with you that price promotion alone is not going to win the day in this environment. It really is about driving that elevated customer experience that people want to come out for and they want to return for. And we think that's best manifested by giving them great food that is well executed in an energizing environment.

Operator: Our next question comes from Matthew DiFrisco of Guggenheim Securities.

Matthew DiFrisco: Do you expect the elevated share buyback to continue in 4Q? There was a significant step up in 3Q from the first half of the year.

Dave Deno: Yes, we don't give quarterly guidance on share buyback. We do have $165 million left on our authorization, and that's good until January 1, 2018. So, we won't provide any details quarterly guidance. I can say though, since January 1, 2015, the Company has returned $500 million of cash back to shareholders between share repurchases and dividends.

And that shows the cash flow power of this Company. So, we will continue to pursue our cash opportunities, but I really don't want to get into quarterly guidance on share repurchases.

Matthew DiFrisco: I was just thinking more, as far as the EPS guidance, what price you'll be expecting for the weighted average shares outstanding on the year.

Dave Deno: We really don't want to get into that kind of detail, so we'll leave it at that.

Operator: Next question comes from Joe Buckley of Bank of America Merrill Lynch.

Joe Buckley: Thank you. A couple of questions. The check traffic play off obviously with the traffic down big and the checkup take, I wonder what that would have had a bigger positive impact on profits? Did it not because of the investments you are making into the experience on the center cut, or are there other pressures that prevented that from happening?
Dave Deno : Hi Joe. There's a couple of things. One, yes, we are making the investments.

And two, labor costs for us are up 3.5% this year, and I think the restaurant industry itself is seeing that. So I would say those two things pretty much stand out as we look at the profitability of the business.

Joe Buckley: Okay. And then a question on the overtime rules kicking in for a $9 million hit next year. What level of management and what brands kind of triggered that? I would have probably guessed that your compensation levels would have been above those new trigger points?

Dave Deno: Yes, I think what we're trying it's our assistant managers, Joe, you know, in our company.

And we really don't want to get into the kind of detail because we'll be communicating to our people over the next few weeks. But as we looked at the rules and we looked at how we're going to go about it and things, we think this could be a $9 million impact to next year. And we'll provide some more detail in February, but we are working out the final recommendations in our communication strategy to our people.

Joe Buckley: Okay. And then last one.

You mentioned Bonefish last call, this call, is kind of the poster child for where you're trying to take Outback. So I guess a couple of questions. Bonefish I always viewed as a little bit more specialized brand, a little bit higher end brand than Outback. So, is that a good analogy? Is Bonefish does the Bonefish experience transfer over to a brand that is much more mainstream with a little bit lower check at Outback? And then I think you mentioned Bonefish profitability being at record levels. Can you just sort of talk about that a bit? Obviously, there the traffic was the comp was up.

Traffic was still down.

Dave Deno: Sure, I'll take the back half question there, Joe, and then turn it over to Liz. But I think it's, as we look at it, I mean discounted traffic is not profitable. So when you look you rebuild the brand back with healthy traffic, with people that enjoy the 360 degree experience, profits certainly follow. And that's why we're calling out Bonefish for having a record year this year.

The team has just done a fantastic job and we're seeing in our financial results.

Liz Smith: Joe, in relation to the first comment, we spend a lot of time, as understanding, via consumer research, the health of our brands and our value equation for each brand. And so I would say, for Bonefish, it was about restoring the polished casual and a lifestyle brand. And you saw the coming back of healthy traffic, and that is going to continue to build overtime. And that showed up first in what we told you guys was customer satisfaction levels at record highs.

And we said we believe that's an early indicator and traffic will follow. And frankly, that is the trajectory that we've been on with Bonefish. As we looked at the reinvestment that we wanted to make in the Outback experience, it started specifically from the Outback customer of exactly what they value and wanted to see more of and less of and how do we put that back into the business. So we did what was right for Outback according to what consumers wanted for Outback specifically. Outback has a very high brand regard and very strong brand health metrics, right? And so this notion of Aussi generates and heading back into that was very much in trend with what they wanted.

I would point out that while Bonefish average check is higher, figure, say, around that $24, $25 price point, it's only about $2 higher than Outback. So I wouldn't say there's a big straddling between the two. And I would just tell you that, very similar to Bonefish, the early indications that we have with Outback is that reducing discounting, increasing the customer experience, getting complexity out is having the same positive correlation to customer experience that it had at Bonefish. I think, any time you elevate the customer experience, you're going to benefit. That's being underpinned as well by our loyalty program.

The reality is, though, we are down on straight discounting and that comes out earlier, but we're going to be, we started this journey, we know it's the right journey and we will have the resilience to stick with it because early indicators lead to return of healthy traffic when you stick with it.

Joe Buckley: Okay, appreciate your thoughts, thank you.

Operator: The next question comes from John Glass with Morgan Stanley.

John Glass: Thanks very much. First, just on the dynamic between the check and traffic, is that all due to the reduction in discounting and therefore a higher check, or is there also some trade up that's going on from some of the new menu initiatives you talked about like the center cut for example?

Dave Deno: Yes, it's also a portion of mix.

So it's both.

Liz Smith: It's both, John.

John Glass: I'm sorry. It's both?

Liz Smith: It's both a reduction in the discounting, which is showing up in PPA, as well as reception to our higher-priced LTOs and mix-up. So really focusing on that steak authority.

So if you at what we had, we had, we're out there now with Raise the Steaks, which is kind of a fun, celebrating the center cut. It's a higher price point than you've seen from us in the past. So, it's both.

John Glass: And can you associate how much traffic decline is resulting from the reduction of couponing?

Dave Deno: No, we don't want to get into that kind of detail, John, for competitive reasons and other reasons, but I think we provide in the earnings release some of the detail between traffic price and overall comp.

John Glass: No, I saw that.

And then, on the changes that you have made to the menu, and that's the center cut and service initiative, was you mentioned that you are getting some early traction. Can you point to specific customer metrics? Are they recognizing that, or is it your understanding it takes some time to get people to the restaurant? So is it something you are seeing in consumer scores right away for example?

Liz Smith: Yes, so, John, here's what I'd say to the steak quality upgrade. We are seeing the positive reception from consumers with respect to the investment in the steak and the reception of the investment of the steak and the quality. So, the steak experience, when they come in and have it, they are seeing and positively responding to it. The other investments, you know this category.

It's about a two to three times per year frequency cycle. So, the other investments that we are making, which is the portion upgrades, the quality upgrades, the service investments, they're going to be strengthening and take a little longer to play out and be seen in the healthier traffic. But there's no question that they are noticing the quality upgrades, they are noticing the portion, and we just have to continue to invest in that line as well.

John Glass: Got it. Okay, thank you.

Operator: Our next question comes from Jeff Farmer of Wells Fargo.

Jeff Farmer: Thanks. Dave, just following up on one of Joe's questions, what is your current expectation for the combined impact of I guess both the wage rate inflation that is persistent for most of these concepts and then the new overtime rules on labor costs? So if you're looking at those two things in tandem, how potentially painful is that going to be for labor in 2017?

Dave Deno: Yes, we're looking at 3.5% to 4% in labor cost increases next year. And then we talked about the overtime piece. We'll give more complete guidance in February on how all the things come together, but that's what we see on the labor line.

Jeff Farmer: And then one more. You guys did touch on it, but, in 2Q, you had that 25% decrease in straight price offers through digital and FSI. You might have commented on it about the Q3, but where did that stand in Q3 in terms of the straight price offers reduction? And what are your thoughts in terms of going into Q4 and heading into 2017 in terms of utilization of those straight price offers?

Liz Smith: Yes, I'm not sure we gave the exact number. You're talking about digital and kind of parsing out. What I'd say to you is that there was a meaningful reduction again in Q3 in the number of straight discount offers impressions, and that will continue.

But I really -- I don't want to get into some type of linear march other than to say that overall we are committed to continuing to reallocate a portion of that back into the investments that we talked about because we know that they result in medium- to long-term good things and healthy traffic and sticky traffic and traffic that returns. So, as I said on the last call, we think we were over-allocating our spending towards a portion of the population that was going to trade up on traffic according to do had the most recent price out. So it's a pivot. Now, what I answered earlier is I want to be clear. We are nimble and agile and cognizant of the environment and we're going to continue to have wow food offerings and promotions that are engineered to appeal to value.

But the straight discounting is what we're moving away from as well. And I don't want to give a quarter-by-quarter march, but it was a factor in Q3 as well.

Jeff Farmer: All right, thank you, Liz.

Operator: Our next question comes from Karen Holthouse with Goldman Sachs.

Karen Holthouse: One of the things we've heard from a number of companies this earnings season is some trimming of unit growth forecasts largely related to this increased construction cost, use costs.

Is it 2017 and beyond, how are you feeling about sort of the long-term unit growth targets and where those -- as you are looking at sites, where they're shaking out versus your internal [indiscernible]?

Dave Deno: Yes, sure. Like I mentioned earlier, we will provide more detail on unit count, unit growth in 2017. So let me just talk about the priorities of the Company because we talked about on prior calls. One, we've got a great international business. And so we're going to be pursuing that in a lot of our new unit opportunities, especially in Brazil, and we are getting really excited about what's going on in China.

Those two things will be where we'll be dedicating our own Company expansion in those two markets. Secondly, we really believe in taking care of and upgrading our restaurants. So a lot of our capital will be dedicated to remodels. And we're getting more and more traction on relocating Outbacks, which we continue to see significant sales growth as we relocate those restaurants, and we hope to make more progress on that program next year. We think we have 100 locations at Outback that we can potentially relocate.

So, the capital strategy of the Company will be to expand our great international business, really invest in what we have today, and grow same-store sales and look at the relocation opportunity at Outback. That strategy remains.

Operator: Our next question comes from John Ivankoe of JPMorgan.

John Ivankoe: Liz, we've talked a lot about lunch in the past at Outback, and I guess we've had a lot of time to see lunch at the system in terms of what maybe it's done to your average ticket and how the consumers perceive the brand. Obviously, lunch puts you in a very different competitive set, namely fast casual.

That may not -- it's just a dinner. But it's adds operational challenges. It takes away marketing dollars, what have you. Is lunch still a necessary part of the Outback business today? And as you've kind of evaluated the profitability of each individual unit that sells lunch, are all of those dayparts profitable, or might some be unwound in the relatively near future?

Liz Smith: Yes, so, John, when we say a necessary part, it's a necessary and a profitable part. So, I guess the first thing I'd say is that lunch at Outback is performing well and the majority of our sites are -- it is a moneymaking venture for us and we don't have any plans to unwind that.

On the contrary, we think, as awareness continues to build and simplicity in the restaurant continues to allow us to execute both lunch and dinner with more consistency and pace, et cetera, that that occasion is going to get stronger as well. So, there's no -- honestly there's no metrics that are heading in a different direction on lunch other than the industry headwinds that we are experiencing we feel as well on lunch. So, Dave, I don't know if you want to comment with any more specificity on the hurdle rates, but we are well above them and we haven't seen any deterioration on that at all.

Dave Deno: Yes, John, good cash flow coming out of the segment and it's a good addition to the Company.

John Ivankoe: And then secondly, Dave, a question for you.

We oftentimes talk about annual productivity targets. Obviously, in 2017, you talked about the $9 million from labor. You talked about wage rate. You talked about commodities. But is there a target in 2017 that -- and not just overall productivity but net productivity savings that you are targeting that you want us to think about for the models?

Dave Deno: Yes, sure.

We have a long-term look at productivity in our business and we continue, John, to take advantage of that. We don't get any kind of net numbers, but we will continue to pursue we believe our long-term model. Our long-term model has been at least $50 million of productivity each year. We will be reallocating some of those funds obviously to help cover some of our investments and some of our cost increases. But if you look at what's available to the Company, both within the systems we put into place at the restaurant level and, more importantly, and more importantly, we will be pursuing upstream savings in our supply chain with our distribution, and we're seeing success there.

So more of our productivity will shift to upstream savings going forward. But the answer to your question is we think we have a multi-year opportunity in productivity on a gross basis of at least $50 million a year.

John Ivankoe: Can you elaborate on those upstream productivity savings, just how that may have benefited 2016 and how that could potentially benefit 2017?

Dave Deno: Yes, I really don't want to get into too much detail, John, but we have experience at our Company looking at how we work with suppliers and how we look at our distribution business to take costs out of the business and to partner with our suppliers. One of the things that's happened for us is, as we get more and more granular and better in some of our systems and ability to predict in our restaurants, ability to predict trends in our restaurants, that improves inventory ordering; that improves working capital; that improves ordering with our distributors. It's those kinds of things as well.

So, working on cost reductions with suppliers and distributors, John, but also as we get more granular at the restaurant level and improving our ordering process and inventory management, that will flow upstream as well.

John Ivankoe: Thanks.

Liz Smith: The only other thing I would add to that is we talked about in November, next month, we are simplifying the menu. It's about a 20% reduction, 19 items, about a 20% reduction. And we know, from testing, that's going to do a couple of things.

Right? It's going to improve consistency, pace and execution of the core experience, which is critical, but it's also going to simplify operations in the back and the front of the house. And that always simplification always leads to good things in terms of not only quality but efficiency in the box as well. So, that's something that's coming out next month. We've tested it and that will roll through as well in support of better operations in the box, better both better pace and timing and experience as well as efficient.

John Ivankoe: Thank you.

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

Andrew Strelzik: There hasn't really been any discussion around Carrabba's. I don't think you mentioned it in the script at all. And I'm hearing the analogies being made between Outback and Bonefish. And I'm wondering what role Carrabba's plays in the portfolio going forward? And do you feel like any of these strategies that you've implemented at the other two concepts, maybe there's some opportunities at Carrabba's in the same regard? And maybe if you could also talk about what you're seeing there with the menu?

Liz Smith: Sure.

So, the new menu, which is not so new anymore, definitely it moves the needle and improves suitability for everyday dining and we saw that. But Carrabba's sweet spot is still the weekend and special occasions, and so we're really pivoting our focus towards the weekend and special occasions. And our innovation which you'll see coming up in Q4 and other things are going to be focused on providing surprise and delight experiences that capture that weekend as well as that special occasion. For us, Carrabba's is about celebration, abundance, quality. You probably saw we just came out with increasing our pasta sizes by 25%.

That's not a promotion. That's actually a spec upgrade that we are doing. The playbook for Carrabba's that the Italian segment is extremely competitive. And according to MPD, last quarter was its most competitive quarter ever. The growth opportunity for us is in continuing to deliver that quality service, capture the weekends, get the special occasions, and we're starting to really mine that and see traction.

So we've been doing wine dinners, monthly wine dinners, at $40 a head, which have been very well received. We are also looking and driving our off premise occasion. Italian travels very well. And we came out with family bundles, which is a dinner for four. And that really has helped drive our off premise business up about 10% last quarter from a -- and we see that continuing to grow and continuing to build.

So, a bit of a different playbook on Carrabba's, which is kind of getting but then Italian is a different category and it's very promotional. For us, it's about continuing to own that innovation in special occasion. The role of Carrabba's in the portfolio, we've always said that we are a focused, a founder inspired brands that have quality that we can continue to promote, and Carrabba's certainly falls in line with that. I think, for us, each brand though has a different value equation. And for us, we are gaining traction and seeing traction on what I said was investments in special occasion and off-premise for Carrabba's.

Also, the loyalty program, which we haven't talked about, it goes across all of the brands and we're seeing really nice pickup across all of the brands on that, and we think that that will benefit the entire portfolio of them. So that will also be something behind them.

Dave Deno: Yes, one thing I'd like to add too is, when you talk about Carrabba's, you have to look at the international piece as well. Liz mentioned about the Abbraccio brand in Brazil. That's making a lot of progress.

And Italian is the number two segment outside of the United States and we think we are very well positioned to expand that brand internationally.

Andrew Strelzik: I very much appreciate all of the color on that. And I have one more if I could squeeze it in. How did you decide on the 19 items to remove from the Outback menu? Why is that the right number? Is there anything thematically across them either by price point or how much of sales do they represent? Any color on that would be great.

Liz Smith: Sure.

We spend an awful lot of time looking at what variety had gotten us over the years and balancing that with what variety had cost us in terms of increased complexity that made it harder to execute the core experience in the box. And so we had a number of iterations and consumer input and feedback and the typical analytics on turf, et cetera. But when you have that type of simplification of 20%, you really want to make sure that, when you put it in the box, it really does result in a level change in complexity, which allows you to lift the water on executing the core experience significantly because that core experience, "steak and", for us if you will, still represents the majority of why people come to you. So, we realized that while we had gained ancillary sales from adding variety over the years, it had cropped up to a tipping point where it was hurting our delivery of the core steak experience. Okay? So it was a balance between making sure we had variety but removing complexity that compromised the entire, the complexity in the restaurant.

So, we arrived at that through consumer testing and through in market, I mean obviously this has been in stores and we have been iterating on that as well. In terms of sales, you know, what they were, what I would call them is ancillary sales. So, in the short-term when you take them out, whether it was the Mini Milkshake is a good example them or maybe tacos at dinner, in the interim, it might have short-term the fact but what it does is it allows you to execute your core steak house experience better and that comes back in. So we think that it'll be very well received and that's coming out next month.

Andrew Strelzik: Thank you very much.

Operator: And our next question comes from Jeffrey Bernstein from Barclays.

Jeffrey Bernstein: Two questions. One, I guess, Liz, you talked a lot about the weak CDR category and a couple of things you mentioned was the discounting and the capacity. I was just wondering whether you hired those because you are seeing a change either for the better or for the worse? I know especially on the capacity side, I think you had said it's increasing. We had heard some signs and seeing some signs of some closures.

So I was just wondering on those two fronts in terms of the impact to casual dining whether you're seeing any trajectory change and whether you think you're being hit similar to the rest of the casual dining peers or whether there is maybe some self-inflicted things are hitting you guys more? And then I had one follow-up.

Liz Smith: So, your first question, I'll just comment on the state of the consumer and then what is over and above kind of what's been challenging Outback. I think the CDR industry has been over capacity for a while. I think the reason that it becomes even more noteworthy is that, for the reasons that we talked about before about disposable income, kind of Boomer confidence levels, proliferation of alternatives, value gap versus price, you see right now casual dining traffic challenged. So if traffic is going down, and I think traffic was the lowest in Q3 than it's been since 2009, and you're still adding supply growth of 2% to 3% a year, that becomes a bigger delta, right? I don't think you've seen, and I haven't seen anything showing of up in the carrot to suggest that capacity is now going in the other direction.

I think that would be a great thing for the industry but what we see is that there's a lot of capital out there that is chasing coming into this space. So we don't think that there's going to be any type of shakeout, so when you have a consumer environment that's weakening but yet the funnel keeps getting filled up at an historical rate in excess of supply, I think that becomes a bigger challenge for everybody. In terms of what we have that I think we've been hopefully pretty transparent about, Outback was a negative 0.7% comp. We're not happy with that but it was still outperforming the industry and we purposely managed the transition from price -- over-allocation on price promotion to investing in experience. We know that price promotion traffic comes out earlier and investment in the core experience flows in.

We also know that it is absolutely the right thing to do for the business over the medium- to long-term and that we need to start the journey and be patient and it will be resilient. When you look at kind of what drives the brand, you start with a high brand regard. You elevate the food. You elevate the portions. You elevate the service.

You update the box. You build out a burgeoning off-premise occasion, which is the first structural tailwind I've seen in this industry, and it's going to be of size. And then you look at the loyalty program that we overlaid and that we tested for three years. And what gives us confidence is that we're going to be resilient and take the medium- to long-term view. While not seeing and turning a blind eye to the environment, I want to really continue to say you're going to see wow offers from us like Walkabout Wednesday.

But we think that we over-allocated the price promotion in the past and that we are in better balance now for kind of the future. So I think that's our piece certainly that we own as well.

Jeffrey Bernstein: Okay. The follow-up was just I think, in your prepared remarks, you said obviously the focus on increasing total shareholder return and then you mentioned the real estate and the share repurchase I think you said were two of your strategies. I thought it made it sound as if those are two of many.

I was wondering whether there are any other strategies that we should think about in the short or medium term, again besides the real estate and the related share repurchase that you've done?

Dave Deno: Yes, Jeff, we always -- if you look at what we've done since we've been a public Company, we've sold Roy's. We addressed Korea. We've done a fantastic job on the sale-leaseback. I think the numbers are just really fantastic. We've looked at franchising overseas and we look at -- we're always looking at how we go to market for our brands in the U.S.

and overseas. So, you can count on this management team to continue to look at opportunities to increase shareholder return. And that's what we will continue to do, and I think we have a really wonderful track record on doing that.

Liz Smith: And just to build on that, our responsibility is to do just that. So, we need to constantly be evaluating, right, the composition of the portfolio, the composition of the go-to-market, where we put our assets.

And our commitment is that we will be disciplined stewards of capital and continue to evaluate that. That's a live and active thing, and, frankly, you have to be in this environment. You have to be alive and active in evaluating what's the best portfolio strategy.

Operator: We have reached the end of our question-and-answer session. I would like to turn the call back to Liz Smith for closing remarks.

Liz Smith: Great. Thank you operator. Thanks everybody for joining us on the call today. We look forward to updating you on our progress in the Q4 call in February. Thanks again.

Operator: This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time.