Bloomin' Brands - Q2 2023
August 1, 2023
Transcript
Operator (participant)
Greetings, welcome to Bloomin' Brands' fiscal second quarter 2023 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's now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate, Financial, and Investor Relations. Thank you, Mrs. Kurian. You may begin.
Tara Kurian (VP of Corporate, Financial, and Investor Relations)
Thank you, good morning, everyone. With me on today's call are David Deno, our Chief Executive Officer, and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal second quarter 2023 earnings release. It can also be found on our website at www.bloominbrands.com in the Investors section. Through 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 the 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 recent trends. 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'll provide a brief recap of our financial performance for the fiscal 2nd quarter 2023, an overview of company highlights, and current thoughts on the 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I would now like to turn the call over to David Deno.
David Deno (CEO)
Well, thank you, Tara. Welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q2 2023 diluted earnings per share was $0.74, which compares to $0.68 last year, up 9%. Combined U.S. comparable sales were up 80 basis points, with each of our casual dining brands having positive same-store sales. Importantly, this reflected 110 basis points outperformance on traffic versus the industry in Q2. I am pleased with our U.S. results as they continue to validate the strategic and operational framework we outlined for the year. This includes leveraging our leading off-premises business, the addition of sales layers, growing digital capabilities, and improving operational effectiveness and efficiencies. Turning to our international business, simply put, we had an exceptional quarter. This was led by our Brazil business.
Q2 revenues were up 17% due to new unit openings, the Brazil tax benefit, and strong same-store sales growth. Additionally, operating profits and margins were up significantly versus a year ago. Our international business is very strong, with lots of growth ahead. For us, international is a unique asset in casual dining. I'd like to thank our teams in the restaurants and the Restaurant Support Center for their continued commitment to serving our guests. Your dedication to great hospitality, service, and experience is what makes our company so successful. As you look ahead to the rest of the year, we are focused on achieving our full year guidance and objectives. We continue to have confidence in our strategy to elevate the customer experience while achieving sustainable sales and profit growth.
As a reminder, our key strategic priorities are to drive same-store sales growth, maintain off-premises momentum, become a more digitally driven company, sustain the progress we've made in operating margins, and increase new restaurant openings. Improving same-store sales growth is a multifaceted approach. Sustainable traffic growth, especially at Outback, continues to be the primary focus. We have several initiatives in process to achieve our goal. As I mentioned last quarter, we are utilizing innovative technology to improve execution and consistency in our restaurants. Outback servers now use handheld technology, which allows them to spend more time with guests and deliver a differentiated guest experience. Our new cooking technology in the back-of-the-house, including advanced grills and ovens, is on track to be completely rolled out in the third quarter. Our guests will experience improved product quality and overall meal pacing.
Recently, the annual ACSI Restaurant Study of Customer Satisfaction was released, and Outback Steakhouse has emerged as the industry leader in casual dining, moving from number six in 2022 to number one in 2023. This is a tremendous accomplishment. The investments we are making are clearly paying dividends. Our guests recognize the actions we are taking to improve the overall guest experience. Over the long term, we expect this to drive sustainable traffic growth. Complementing our restaurant operations is more targeted marketing designed to drive guest frequency, leverage our heritage, and build brand equity. Earlier this year, Outback brought back the No Rules, Just Right platform, leaning into our Aussie roots. This is an attitude that goes beyond just marketing. It's how we reenergize our restaurants with new food offerings, exceptional service, and importantly, it ties back to our past.
No Rules, Just Right highlights our great menu and everyday value. For example, our current seasonal offerings feature new menu innovation that start at an accessible $16.99 price point. The third element to our sales building strategy is introducing additional sales layers. For example, Fleming's launched Social Hour earlier this year. This captures our creative food and drink offerings during the early evening. At Carrabba's, they have reintroduced their successful Wine Dinners. These highlight the quality and great value that Carrabba's is known for. Bonefish has enhanced their weekend Brunch and introduced a Social Hour. The response to these offerings has been positive, and we are seeing early success.... The final sales driving strategy is improving our asset base. We spent the last two years developing different scopes that can now be deployed dependent on a restaurant's need.
This is the beginning of a multi-year effort to touch a large percentage of our restaurants. We are on track to remodel over 100 locations this year. We'll accelerate our remodel pace in years to come. All the initiatives I just described are designed to build sustainable sales and traffic growth now and over the long term. Turning to our second priority, continuing to capitalize on our leading off-premises business. Total off-premises was 24% of U.S. sales in Q2. Our third-party delivery business continues to perform well. Importantly, off-premises profit margins are comparable to margins of the in-restaurant business. Catering continues to be a growing opportunity for our brands. The Carrabba's team is an industry leader in this space. We recently launched Carrabba's Sandwich Bistro, which is a lunch-focused catering option featuring a wide variety of sandwiches that represents Carrabba's Italian Heritage.
We are very excited by the early results and believe this could represent growth opportunities beyond catering. We are also very pleased by the strong momentum we are seeing in catering at both Outback and Bonefish. As a result of all the above, we expect off-premises to remain a large part of our business. The third priority is to capitalize on our progress to become a more digitally driven company. Consistent with Q1, approximately 79% of Q2 total U.S. off-premises sales were through digital channels. This compares to approximately 75% of total U.S. off-premises sales in Q2 last year. We continue to see positive results with our new online ordering system and mobile app, which has 3 million users. Our fourth priority is to maintain the significant progress in operating margins over the last four years in a highly inflationary environment.
During this time, we grew our adjusted operating margin from 4.6% in Q2 2019 to 7.8% today. This starts with growing healthy traffic across our in-restaurant and off-premises channels. We reduced the reliance on discounting and promotional LTOs, and reallocate advertising spend to more targeted, high-return digital channels. We remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in commodity, labor, and overhead. The final priority is to build more new restaurants, especially at Outback, Fleming's, and in Brazil. Each have strong sales and profit margins and offer great returns. Domestically, Outback and Fleming's have significant growth opportunity in core geographies. In Brazil, we can more than double our footprint. Today, we have 148 Outbacks, and we expect to have nearly 300 Outbacks in Brazil by 2028.
More to come on new unit development on future calls, but we expect to have a meaningful increase in new restaurant development in 2024. In summary, we are pleased with the success in our business for the first two quarters of 2023. We are focused on achieving our annual goals while building a great business that will continue to thrive for many years to come. With that, I will now turn the call over to Chris, who will provide more detail on Q2 and thoughts for the remainder of 2023.
Chris Meyer (EVP and CFO)
Thanks, Dave. Good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal second quarter of 2023. Total revenues in Q2 were $1.15 billion, which was up 2% from 2022, driven by a 0.8% increase in U.S. comparable restaurant sales, as well as a 4.1% comp sales increase in Brazil. In our U.S. brands, traffic was down 4.2% in Q2. This is in line with expectations, and importantly, we outperformed the industry by 110 basis points. Average check was up 5% in Q2 versus 2022. Benefits from average check will continue to move a little lower as the year progresses, as menu pricing rolls off.
We do not intend to replicate the same level of menu pricing this year as we took in 2022. At 24% of U.S. sales, Q2 off-premises increased 100 basis points from Q1. Importantly, the highly incremental third-party delivery business remains healthy and was 12% of U.S. sales in Q2. In terms of brand performance, Outback total off-premises mix was 26% of sales, and Carrabba's was 33% of sales. Carrabba's already strong off-premises business has been supported by consistent growth in catering. Catering was over 5% of Carrabba's sales in Q2. We are also seeing success in catering at our other brands and will continue to emphasize this sales layer across our portfolio moving forward.
As it relates to other aspects of our Q2 financial performance, GAAP diluted earnings per share for the quarter was $0.70 versus -$0.72 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.74 versus $0.68 of adjusted diluted earnings per share in 2022. The difference between our GAAP and adjusted results in 2022 was almost entirely driven by the required accounting treatment for the Q2 2022 repurchase of a large portion of our convertible notes. Restaurant-level operating margins were 16.4% versus 15.5% last year. Domestically, the benefits from our pricing and productivity initiatives continued to offset inflation. The technology we are putting into our restaurants is having an increasingly positive impact on our margins. As it relates to inflation, commodity inflation was up 2.8% in Q2.
We had favorability in dairy and produce, which helped to lower the overall inflation levels. We do expect commodities to be higher in the back half, particularly Q4, as we lap some 2022 beef favorability that we were able to realize. We still expect total year inflation to be mid-single digits. Labor inflation was up 5.6%. This was in line with our full-year guidance expectations of mid-single digits. Restaurant operating expense inflation remained elevated at 7.6%. This was driven by higher advertising, R&M, and utilities. Worth noting as it relates to restaurant margins, international segment restaurant margins were up 280 basis points. This was driven by the continued growth in our Brazil business, as well as the Brazil tax exemption benefit. Total company operating income margin was 7.8% in Q2, flat from last year.
Depreciation expense was up in Q2, consistent with our increased levels of capital spending and our investments in infrastructure to support growth. Overall, we feel good about our margins, and we remain well above pre-pandemic levels. Turning to our capital structure, total debt was $770 million at the end of Q2. Our current lease-adjusted leverage ratio remains below 3x. In terms of share repurchases, year to date, we have repurchased 1.8 million shares of stock for $43 million. We still have $97 million remaining on the new authorization that the board approved on February seventh. The board also declared a quarterly dividend of $0.24 a share, payable on August 25th. We are pleased with our balanced deployment of free cash flow and will continue to deploy dollars against additional debt paydown, share repurchases, and our dividend.
Before I turn to our guidance, I wanted to provide an update on the latest developments in Brazil as it relates to our eligibility for the Brazil tax exemption we discussed in our February earnings call. During our February call, I mentioned the Brazilian government enacted legislation that introduced a 0% rate for both corporate income taxes as well as certain federal gross revenue taxes for a period of five years. A Brazilian court order reinforced our eligibility for this exemption, and we began to realize this benefit in our financial results. Recently, the Brazilian legislature unexpectedly passed a new law that eliminated the ability for many businesses to benefit from this tax exemption, impacting many restaurant companies, including our business in Brazil.
This change will have the following impacts on our financial statements: First, we had a $4 million one-time tax benefit to our Q2 financial statements as we had to revalue certain Brazil deferred tax assets. Second, we will now be subject to Brazil gross revenue taxes beginning in the fourth quarter of this year. This will reduce our fourth quarter operating income by approximately $6 million. Given the impact of the Q2 tax upside and the Q4 tax downside largely offset, this new legislation should not impact our ability to attain our 2023 full year EPS guidance. Finally, beginning in 2024, Brazil will once again be subject to paying full corporate income tax at an approximate 34% rate.
Although we are disappointed with this latest development, we remain on track to receive an approximate $0.25 EPS benefit from this tax exemption in our 2023 income statement, representing significant cash tax savings. Turning to our 2023 and Q3 guidance. First, we are reaffirming all aspects of our full year 2023 guidance previously reported on our February 16th earnings call, aside from a change in our tax rate assumption. Given the one-time tax benefit we received in the second quarter, we have lowered our full year tax rate assumption to be between 12%-13%. Second, as it relates to the third quarter, we expect U.S. comparable restaurant sales to be 0.5%-1.5%, and we expect Q3 adjusted earnings per share to be between $0.41-$0.46.
In summary, this was another successful quarter for Bloomin' Brands, and we are well on our way to becoming a better, stronger, operations-focused company. With that, we'll open up the call for questions.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate it. Your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it might be necessary to pick up your handset before pressing the star key. One moment while we polling for questions. Our first question comes from Jeff Bernstein, Barclays. Please, sir, go ahead.
Jeff Bernstein (Equity Research Analyst)
Great. Thank you very much. two questions. First one, just thinking more broadly, about the consumer, seems like your com trends were pretty much in line with expectation and ahead of the industry. I'm just wondering if you're seeing any changes in behavior that you would apply at any or all of your brands, presumably any kind of softening? Then I had one follow-up.
Chris Meyer (EVP and CFO)
Sure. Good morning, Jeff. We just see the consumer hanging in there, and if you look at the economic reports and you look at everything else about the, the economy, we're seeing that as well. The high end is doing well and, our casual dining brands, we see the consumer hanging in there.
Jeff Bernstein (Equity Research Analyst)
Got it. There's been no noticeable over the past few months, change in trajectory, whether it's traffic or mix or anything like that, it seems like it's relatively stable?
Chris Meyer (EVP and CFO)
No, if you look at the mix line, I think we, like, like we said, like middle of Q4 of last year, we turned negative in mix. We were down 200 basis points in Q1 in mix. Still down 200 basis points in Q2. I, I expect that negative mix trend to be somewhat consistent as we head throughout the year, until we start to lap it, kind of in the middle of Q4. Look, it's still negative. I think a lot of that, on our part, we believe is engineered. There probably is some small element of consumer trade inherent in that mix number. Other than that, no, I think that look, I mean, our guide actually implies, if you look at Q3, a tick up in traffic from where we were in Q2.
If you look at Q4, you can imply another tick up in traffic in Q4. There is an expectation that the consumer continues to hang in there, that our trends continue to improve as we do the things we need to do to improve our trends.
Jeff Bernstein (Equity Research Analyst)
Understood. Just the, the follow-up related to your commodity and pricing commentary. I think from commodity, you said pretty much still mid-single-digit inflation. I'm just wondering what your thoughts are, specific to beef, which seems to gone outside attention, whether you expect any change. I think you're pretty well protected for this year, as you start to think about 2024. On the flip of that, I think you said that your pricing won't be as aggressive in the second half of 2023. If you could just clarify what the pricing will be in the third and fourth quarter to mitigate those inflationary pressures. Thank you.
Chris Meyer (EVP and CFO)
Yeah, sure. Well, I think the, the good news is a couple things. One, from a, from a beef standpoint, you're right. I mean, we, we've done a excellent job this year in mitigating exposure to beef. I think the, the one thing that I, I called out last quarter that I would continue to call out is that because we did have beef upside in the back half, particularly the fourth quarter of last year, and we were able to take advantage of some of that favorability, we do have a more challenging lap from a commodity perspective in Q4. Our commodities in Q4 will be a little more elevated, and that's 7%-8% range versus the 3% or 2.8% that you saw here in Q2. That's something to keep in mind for the balance of the year.
Look, it, it, it's way too early to be talking about, you know, 2024. We obviously see the same things that you do as it relates to commodities. I think that one thing, you know, our performance this year has shown is that we find a way to navigate uncertain environments in the commodity landscape, and we feel pretty good about that. In terms of pricing, if you look at, you know, look, like I said, I, I would expect, let's just start with check average. As you work through your way through the balance of the year, I would expect check average to kind of continue to tick down. If you saw it in Q1, our, our average check, you know, was kind of in that 6% range. Q2, it's in the 5% range.
Wouldn't surprise me if Q3, it landed in that 4% range, and then, you know, even closer, a little bit lower than that, maybe in the 3% range or so in Q4. I would expect that check average to continue to tick, tick down, and I think that's driven largely by menu pricing. I think our menu pricing was pretty consistent in that 7%-7.5% range over the first half of the year. I think it would tick down a little bit in Q3, and then it would tick down even farther in Q4. We would probably exit the year. Again, we're trying to preserve optionality as it relates to pricing. We're not gonna, you know, marry ourselves to a pricing number in the fourth quarter.
If we were to do nothing additional for the balance of the year, you'd exit the year in that, you know, 4%-4.5% range pricing. Again, because we've had such success with productivity and because we've been able to navigate the commodity environment so effectively, our intention is to not take additional pricing for the balance of the year, which is, you know, one of the reasons why we're, we're being pretty, pretty, you know, sticking to the guidance that we've laid out for the full year.
Jeff Bernstein (Equity Research Analyst)
Thank you.
Operator (participant)
Our next question comes from Alex Slagle, from Jefferies. Please, sir, go ahead.
Alex Slagle (SVP and Equity Research Analyst)
Hi, thank you. Good morning. Wanted to ask on the development plan and your expectations for the years ahead. It sounds like, still looking for a material increase in 2024, and the comments on Brazil getting near 300 units by 2028. I mean, are there any changes or altering your view at all on where that growth is coming from the next few years, by brand or region, or is that still kind of in line? Just any comments on the remodels accelerating further in 2024 and years ahead, if that's sort of altered at all?
David Deno (CEO)
Yeah, sure. We'll, in a future call, in the coming months, we'll provide greater visibility into our development plans. It's very similar to what we talked about on prior calls. We will see a meaningful step up in development next year. We're seeing it in Outback and Fleming's, and which we're very excited about because both brands have, you know, a lot of white space ahead of them, especially in core markets. We'll continue with our remodel plans in the U.S. as we upgrade our restaurants. The growth you'll see will, will be a new unit development, will be something we haven't provided to investors in quite some time, and we've got the pipeline to prove it and the returns as well. That's number one. Number two, I can't say enough about the Brazil business.
The sales, the margins, you know, at one point, we thought we could get to 100 Outbacks in Brazil. We now think we can get to 300. It's got an unprecedented market position down there, and importantly, they're doing it with their own cash flow. They're generating the cash to build the new business. It's primarily led by Outback. We do have a Italian business down there we call Abbraccio, but Outback is a lion's share of development down in Brazil. That business just continues to perform extremely well. Lastly, I think we can do all this and yet still maintain our long-term cash distribution strategy on paying down debt, returning cash to shareholders, and spend capital within those plans I just talked about. More to follow in future calls.
Alex Slagle (SVP and Equity Research Analyst)
Thanks. As a, a follow-up to that, the international operating margin, I mean, it was up year-over-year, like $15 million in the first quarter, another $6 million year-over-year here in the second quarter. You know, I, I know there's some of the Brazil tax exemption benefit, but I mean, it seems like the underlying margin trend is really strong, and I don't know if you could break that down a bit further and just sort of a read-through of, of how the margins are doing there, just on a base basis.
Chris Meyer (EVP and CFO)
Yeah, no, they, they continue, even if you, you pulled out the tax benefit, and again, it's gonna be outsized if you look at the international segment, the tax benefit from, or the tax exemption benefit that we've been receiving, is certainly having a pretty material positive impact on their margins. You know, to your point, outside of that, the benefits that we're getting from check average and from traffic in that business are really driving the day as it relates to the margin upside. Particularly when you look at the lines like cost of goods sold, where we've been pretty, pretty favorable over the last, you know, call it several quarters. I think that they're still seeing inflation. Their inflation is somewhat in line with kind of the same inflationary trends that we've been seeing here in the U.S.
Again, given the volumes that those businesses generate and the ability for them to generate, you know, high sales volumes and traffic growth, that's really what's carrying the day as it relates to the Brazil business.
Alex Slagle (SVP and Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. Our next question is came from John Ivankoe, J.P. Morgan. Please, sir, go ahead.
John Ivankoe (Managing Director of Equity Research Analyst)
Hi. A couple, if I may. First, it's a question on COGS. You guys obviously showed a 200 basis point decline in the second quarter, which is, I mean, that's a really big number year-over-year, you know, for a restaurant company. Yet, at least in the U.S., you know, same store traffic is negative. How do you, you know, when you think about, you know, gross margin, you know, ability to maybe reinvest some of that gross margin to drive traffic, you know, new menu, I understand just No Rules, Just Right is, you know, starts at $16.99, if that's kind of the right price point. Just philosophically, how do we, you know, kind of balance that expanding gross margin with declining same store sales, or declining same store traffic?
David Deno (CEO)
Yeah. Well, first of all, our traffic trends outperformed the industry. I wanna make sure we're clear on that.
John Ivankoe (Managing Director of Equity Research Analyst)
Yes.
David Deno (CEO)
I, I completely agree, John. Managing the margin traffic trade-off is so important. The beautiful thing about when you have strong margin performance, you can reinvest that back in the business, as you know so well, right? So we ask yourself, why are we seeing some of this, cost of sales improvement? Well, it's the productivity initiatives we've talked about with the ovens and other things that we've got going on in our business. The supply chain team has done a great job managing cost of sales. That's what we're seeing it, John, but I can assure you, as we think about traffic building initiatives, and Chris talked about how we expect traffic to build the rest of the year, we're gonna use some of those margin dollars to reinvest back in the business in some of our offerings.
I don't want to get into the details, but that's our philosophy.
John Ivankoe (Managing Director of Equity Research Analyst)
Okay. All right, understood. Secondly, versus 2019, Brazil actually looked pretty consistent between the first quarter and second quarter. Obviously, there is a pretty big one-year falloff between the first quarter and the second quarter, just over 4%. Is 4%, you know, a number that you're happy with in Brazil? I mean, is that? You know, what, what does that, you know, kind of mean to traffic, and how is the Brazil consumer overall, and how is the Brazil consumer absorbing your expansion in the market?
David Deno (CEO)
The Brazil consumer is doing well. Each time we build a new restaurant, John, I tease our development team down there because their projections that they give us, they blow them away. Every new restaurant we build, you know, is exceeding its expectations. The other thing is, as we've seen in other businesses and other markets, when you start going into some smaller towns outside the big cities, when you are the main player, you also have development opportunities that you didn't think were possible. We saw that in other businesses. Capital returns are strong, cash flow is strong, and the Brazilian consumer is in, in good shape.
Chris Meyer (EVP and CFO)
Yeah, the only housekeeping item on that is, John, the only housekeeping item on that is that obviously, you know, last year, Brazil had a different COVID pattern than, than we saw here in the U.S. So they, their Q2 is kind of the first quarter where they're, they're absent some of those big COVID laps that we maybe saw in the first quarter. So that's gonna be a little more normalized trend moving forward.
John Ivankoe (Managing Director of Equity Research Analyst)
Is there a ticket comment you can make on Brazil, just so we, we know that, with both pricing?
David Deno (CEO)
I don't have it off the top of my head. I'm sorry. We can certainly get that to investors.
John Ivankoe (Managing Director of Equity Research Analyst)
Okay. No, that's fine. The final point, and it's a, you know, follow-up to Alex's question about, you know, development remodels. Can you at least, you know, kind of give us a sense? I think the guidance for this year in CapEx is $240 million-$260 million. Directionally, what if you don't wanna give us a specific number, I understand at this point, but directionally, what you think CapEx will be, 2023-2024?
David Deno (CEO)
It, it should be in the ballpark, John. I think one of the things is we uptick our remodels. We might see a slight increase, but we're not sure quite yet. One of the things to think about is, we had a lot of IT spending this year because of the ovens and the-
John Ivankoe (Managing Director of Equity Research Analyst)
Right.
David Deno (CEO)
Handhelds. That's coming, you know, that's coming off. I think, you know, we'll be in that range. We might see a slight uptick, but it's, it's too early to call.
John Ivankoe (Managing Director of Equity Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. Our next question came from Sharon Zackfia, William Blair. Please go ahead.
Sharon Zackfia (Partner and Group Head-Consumer)
... This year. I recall prior to the pandemic, you know, you were, you were looking to potentially sell the Brazilian business. I'm just wondering, kind of philosophically, where you are on, on keep, sell strategic alternatives for Brazil?
David Deno (CEO)
Yeah, there really isn't a market for an IPO or sale right now in Brazil. We are, as you heard from last prior comments, Sharon, we're thrilled with the direction, but it's, it's more market-based, and we'll always keep our optionality open about that business. Right now, our, our goal is to grow it as rapidly as possible, but there's no market for it right now.
Sharon Zackfia (Partner and Group Head-Consumer)
Okay, thank you. The second question, in the second half of the year, and I know you don't normally talk about concepts, but it sounds like you have different things planned. In the first half, we saw kind of Carrabba's lead and Fleming's lag, and you had kind of Bonefish and Outback in between, domestically from a comp perspective. Is that kind of how you would expect the second half of the year to progress? Or is there anything initiative-wise where you would expect, you know, one concept to strengthen or another to maybe taper off?
David Deno (CEO)
Well, let me talk about a couple concepts. First of all, Fleming's trends are very strong, even though they were negative in the quarter. That's because we had, you know, very high spending in fine dining in the, in the category last year, and Fleming's outperformed the fine dining category. If you look at their trends week to week, you know, we see that business to be very strong, and we also see a nice add to that business, which I didn't talk about in the script, is the private dining business. You know, we have high hopes for that as, as people, you know, come back to work or come back to the office and done other things. So Fleming's, yeah, for us, is, is something that, you know, we'll continue to see, you know, that moving along.
That's the first piece of business that I think we would see some change in trend, you know, in balance of the year as far as comps go. Remember, you have to think about what we're lapping. Second one is Carrabba's. They continue to do just a terrific job in in-restaurant dining, their catering business and in off-premise. I think the main thing I want to stress is they've just introduced a line of Italian Heritage Sandwiches that reflect the Carrabba's brand, and it's doing extremely well, and we think we have opportunity beyond, beyond catering with that business. Those Sandwiches are terrific, and I'd encourage our investors to get some because they're really great. I'd say, I, Sharon, what I'll call out right now is Carrabba's and Fleming's.
Sharon Zackfia (Partner and Group Head-Consumer)
Okay, thank you.
Operator (participant)
Next question came from Jeff Farmer, Gordon Haskett. Please go ahead.
Jeff Farmer (Senior Analyst, Restaurants)
Great, thanks, and good morning. Just focusing on the Brazil tax legislation. Street estimates, as you guys know, across revenue, operating income, EPS, basically every line item does reflect the guidance that you guys provided in early February as it relates to that legislation. This was strongly implied in terms of not only the release and what you guys just said, but bottom line is, should we be essentially unwinding 100% of those impacts in our models in 2024 and beyond at this point?
Chris Meyer (EVP and CFO)
Yeah. Let me I'll give you a little more context on that. That is correct. In 2024, we would resume paying full taxes back in Brazil. The way that it works this year is that the value-added tax portion of that is what goes away starting in the fourth quarter. For the first three quarters of 2024, you'd have call it a, a $30 million reduction in sales over the first three quarters, split relatively evenly, then the corresponding, call it $15 million reduction in operating profit over the first three quarters as well. If you look at taxes, you're going to have call it a $10 million-$12 million increase in tax expense spread out basically over all four quarters of next year. It's a little bit lumpy, but not, not worth calling out in any more specificity.
That, that's how it would unwind starting next year.
Jeff Farmer (Senior Analyst, Restaurants)
All right. That's helpful. Just one follow-up. You gave us a little bit of color on the operating expense inflation. Looks like it's come down a little bit. I think you said 7.6%. I might have missed it, how are you guys thinking about operating expense inflation in the back half of, of, of the year?
Chris Meyer (EVP and CFO)
Operating expense inflation should start to mitigate, right? You know, more in that mid-single digits. It's been, it's been more elevated in the front half of the year because you're lapping some, you know, you know, the, the utilities kind of took off a little bit. As you start to lap that, it should improve as you get to the back half of the year, lower than, you know, we're kind of in that 7%-8% range now. It'll probably be more mid-single digits to maybe lower, low to mid-single digits in the back half.
Jeff Farmer (Senior Analyst, Restaurants)
Right. Thank you.
Chris Meyer (EVP and CFO)
It'll step down. It'll step down from Q3 to Q4.
Jeff Farmer (Senior Analyst, Restaurants)
All right. Appreciate it.
Operator (participant)
Our next question, our next question comes from Sara Senatore, Bank of America.
Sara Senatore (Senior Research Analyst)
Hi, thank you. I wanted to ask about, I guess, the shift in your traffic. You know, you talked about intentionally reducing, you know, reliance on discounting and perhaps reducing traffic from consumers who might, you know, be solely interested in those kind of price point offerings. I'm trying to understand sort of how you replace that traffic as you move towards, you know, the goal of having positive traffic growth. Is that more visits from your core customers? Is it bringing in new customers? I guess in that context, if you could talk about, you know, the advertising strategy, since, you know, typically I think of traditional advertising as having a broader reach.
You know, as you make some of these big changes to, you know, Outback in particular, and, you know, presumably try to reach new, new customers. You know, how, how you're thinking about your ability to do that with, with the digital advertising that you're, you're kind of pivoting to?
David Deno (CEO)
Sure. Yeah, you're right. We did remove our, some of our discounting and a lot of our discounting and promotions, and we got the, the customers that usually use that, you know, stop coming to our restaurants, but that's was planned. How are we going to replace that, or how are we replacing it right now? That was gets back to what I talked about earlier. With our margin performance, we can reinvest in our products and our service, and you saw that with the ACSI ratings at Outback, number one, that will be sustainable traffic moving forward. That's what we're trying to do as we invest behind our, our business. Now, we've got to be, as Chris talked about, we've got to be very prudent on our pricing.
Rather than price up and discount back, we'd rather try and be prudent on our pricing and make sure that value comes to the consumer that way, along with great food and great service. Now, we learned a lot, as we talked about during the pandemic, about advertising. Yes, you can reach a broad group of people with, with broadcast advertising and, and that kind of thing. We'll continue to do some of that at the top of the funnel, but we really learned a lot about the digital space, and that's where we're spending our marketing dollars to target those consumers. We want to bring back the loyal consumers more, and we want to reach, continue to reach for new customers as we build traffic.
The key is going to be to take some of those margin dollars and reinvest back in the business, and we may see some of that with additional advertising spend as we go forward, especially at Outback.
Sara Senatore (Senior Research Analyst)
Okay, understood. Then just on the, in terms of what, you know, you are already seeing, are, do you see an increase? You talked also about, you know, kind of digital and, you know, and membership. Are you seeing an increase in frequency? Is there, you know, any kind of leading indicators that, that suggest, again, you know, maybe where that traffic is coming from, whether it's higher frequency, new guests, you know, sort of just to help give some sense of, you know, as we envision improved traffic from here, how, how we should think about that?
David Deno (CEO)
Improved frequency from our dine-in guests and carryout guests, and more reach from our third-party delivery, which is an incremental occasion. That's where we're seeing the traffic gains.
Sara Senatore (Senior Research Analyst)
Thank you.
David Deno (CEO)
Mm-hmm.
Operator (participant)
Our next question comes from Brian Harbour from Morgan Stanley. Please, sir, go ahead.
Brian Harbour (Equity Analyst and Executive Director - Restaurants and Food Distribution)
You know, Chris, we can kind of see what you're implying for the Q4 from an EPS perspective as well. Is, you know, any pressure here just about the Brazil change, or, or was it you alluded to just commodities being there being more pressure in the Q4? Any other drivers of, of kind of Q4 EPS as we start to think about what you're implying?
Chris Meyer (EVP and CFO)
Yeah, you lose the $6 million. It's sort of, you know, we talked about the, the benefit from the tax event exemptions being somewhat neutral for the overall full year guidance, but obviously, there is a bit of an interplay between Q2 and Q4. That is a change in fact, patterns from where we were, you know, a few months ago in terms of how you should think about our fourth quarter. Yeah, I think that the commodity piece is probably the other piece that maybe some folks hadn't fully realized in terms of the, the piece in the building blocks for the fourth quarter. Those are the two big pieces.
The, the one of other thing I would point out for Q4, just so we're all on the same page, just a little bit of a housekeeping, is the, the way it is a 53-week year. So just to, you know, make it clear, we're going to report our comp sales result for the fourth quarter on a 14-week basis. And we'll be able to provide a 13-week basis as well. The challenge with the way that, that the holiday shift this year is that if we were to report on a 13-week basis, we'd have 1 extra operating day in the 13-week because of the timing of Christmas. So we-- we're going to report on a 14-week basis so that you have the same number of operating days in both, both years, and that makes the comp a little more normalized for you.
You know, just a little housekeeping there. No, those are the only two pieces I'd point out, Brian, in terms of how Q4 would come together.
Brian Harbour (Equity Analyst and Executive Director - Restaurants and Food Distribution)
Okay, got it. Thank you. Then just, you know, some of the things around, like new ovens, new grills, handhelds, et cetera, are we starting to see that to some extent in, you know, are we starting to see it in, in labor costs? Are we starting to see in food costs, maybe in the form of reduced waste? Do you think most of that's actually more in front of you? How like, how should we actually kind of see that impact in your, in your P&L?
David Deno (CEO)
Yeah, we're seeing it right now, and that's why the margins look so good. One of the reasons why the margins look so good, and I think we've got some more in front of us because we are still rolling out the ovens. That'll be done this quarter. As we think about 2024, it's way too early to talk about 2024, but we'll see some of that overlap into 2024 as well. These investments in handhelds and ovens have been a big part of our productivity this year in the margin benefit.
Brian Harbour (Equity Analyst and Executive Director - Restaurants and Food Distribution)
Thanks.
Operator (participant)
Our next question comes from Brian Vaccaro, Raymond James. Please, sir, go ahead.
Brian Vaccaro (Managing Director, Restaurants)
Yeah, thanks, and good morning. I just wanted to circle back on the new tech and equipment package. How many of the, of your units had that package in place at the end of Q2? I guess my question also is just on the stores that, that have had it in place for, say, six to nine months, and I'd assume have reached some level of efficiency on it, could you quantify, you know, even if it's a range, just, just any of the benefits you're seeing in key operating metrics, thinking about, you know, percent of stakes sent back or average ticket time or, you know, the waste or labor savings, just, just any, any ballparks you could provide there?
David Deno (CEO)
... We are about what? Three quarters of the way through with the ovens?
Chris Meyer (EVP and CFO)
Yeah, we, we're about 460 Outbacks, then, you know, heading into the quarter, we had, you know, 100 or so remaining.
David Deno (CEO)
You know, we're pretty much through the Outback system, we'll be done, Brian, you know, during that time. You know, for competitive reasons, I don't want to get into the pieces, parts of where we're seeing it, but here's, here's broad, you know, very broad. You see it in the P&L. We're seeing it in improved food costs as we manage that. We're seeing it in, you know, less recooks. We're seeing it in, you know, labor efficiency in the P&L. All, all three of those line items in the P&L, we're seeing demonstrable improvement. The most important thing, we can talk about the P&L, but the most important thing is the customer gets better service with handhelds. We get the table turns, we see, we can manage. We don't want to go too fast, okay?
We're almost like, we gotta make sure we don't go too fast, but we're seeing the customer seeing better table turns. They're seeing better product, which will lead to greater traffic, and they're getting better service. Those, it's the customer side that's the most important thing. Then on the, on the P&L side, it's in food cost, labor, and, you know, some of the recooks and things that we don't have to do anymore. Those, those are the areas broadly that we see.
Chris Meyer (EVP and CFO)
Then I would just add on, on top of that, as you look into 2024, and the reason why we're optimistic that there can be some tails on some of these productivity initiatives, I think the one thing that this new equipment does, is it gives us optionality to really look at the labor model and how we configure the kitchen and things like that. There's opportunity for us to continue to tweak and enhance and, and provide value, you know, to the overall operating model moving forward.
David Deno (CEO)
Then, and then lastly, I don't think I'm getting too far ahead here. You'd expect this out of a CEO. You know, it's obvious, you know, I walk over to Carrabba's and I say, "Well, look what Outback's done. Is there opportunity in the Carrabba's business to do similar things?" It's way too early to talk about that. We've learned a lot at Outback that we can apply to other brands.
Brian Vaccaro (Managing Director, Restaurants)
All right, that's helpful. Dave, you, you also noted some significant improvements in the Outback guest satisfaction score, you know, going from number six to number one. I'm not sure what level that survey, what level of detail that the survey provides, but I'm curious, you know, what areas within that survey, what areas of the guest experience improved the most? Is there any that stood out, if you have that level of detail?
David Deno (CEO)
Yeah, we have our own level of detail as well, Brian, and it's steak accuracy and customer satisfaction regarding how we're cooking our steaks. It's service attentiveness and response to our customers. I want to see our managing partners out in the restaurant talking to customers, and we want our, our servers to engage. Through our own internal data, you know, we see the steak accuracy and the service levels improving.
Brian Vaccaro (Managing Director, Restaurants)
All right. Then just two quick numbers questions. Chris, on other OpEx, could you share what, what was the advertising spend in the second quarter? Maybe remind us how that compared to last year. Then what does your guidance embed in terms of the second half spend?
Chris Meyer (EVP and CFO)
Yeah. If you look at advertising in Q2, we spent, call it, $27 million in total, including international, and last year we spent $23 million. We had about a $4 million pickup. I would say that you're gonna see, you're gonna see year-over-year increases in advertising. I don't know, we're still TBD on kind of the level of that, but I think that you, you can expect to be up year-over-year in Q3 and Q4.
Brian Vaccaro (Managing Director, Restaurants)
Okay. Just on pricing, you talked about it earlier, but I just wanted to confirm, your second half guidance assumes you take no additional pricing from here? Can you remind us also of any pricing actions that you took in the second quarter or the first half of the year?
Chris Meyer (EVP and CFO)
Yeah, we took a little bit in, in the second quarter. That, that takes away some of the need to take pricing in the third, Q3 or Q4. It was obviously pretty low, low levels of pricing. I think that in Q3 or Q4, we're still gonna kind of retain the right to, to change our minds, in terms of how we take or think about pricing. Certainly, in the guidance that we provided, yeah, we're not contemplating, material levels of, of increased pricing at all over the back half of the year from this point.
Brian Vaccaro (Managing Director, Restaurants)
All right. Thank you very much.
David Deno (CEO)
Thank you, Brian.
Operator (participant)
Our next question comes from Dennis Geiger for UBS.
Dennis Geiger (Senior Research Analyst)
Thank you. I wanted to ask another one on the expected improvement in traffic trends and the, and the strength in the satisfaction scores that you spoke to. Just based on the strength of that survey, curious if you could touch a little bit on improving satisfaction and sort of how you think about converting that, you know, to visits. What kind of lag there might be based on the number of times that your customers visit per year? You're probably starting to see some of that, but just curious if you could provide a little more color on that benefit and the, and the timing, perhaps, of that.
David Deno (CEO)
Yeah, we, that will build because we're not a, a business that has, you know, people come every month or 20 times a year, or something like that. They come a few times a year. You know, our frequent users come more often, so obviously they'll see it. This is something that sustainably will build with this kind of improvement. Then when you put on top of it, improved ambiance with remodels, right? This, this is going to have a sustainable improvement in our traffic trends. Then, and then the good thing about it is, we're gonna be able to see it because we're remodeling by sections of the country. We're starting in Florida, so we'll be able to see what how that looks, and so we'll be able to adjust our strategy accordingly.
This is something that's going to build over time because of the guest frequency of our business.
Dennis Geiger (Senior Research Analyst)
Very helpful. Thank you. Then, John, just 1 more. A lot of good things going on within the restaurant, but can you talk a little bit more about the off-premise and delivery opportunities from here? Solid results in, in the quarter, but, you know, just curious how you're thinking about those opportunities going forward and, and sort of how you're sort of looking to capitalize on, on the, the opportunity that's, that's still out there for you.
David Deno (CEO)
Yeah, the consumer wants convenience, and we've built, we've built our capital strategy around providing that convenience in our to-go rooms and our, and our, our delivery rooms and through our technology. We're continuing to make significant progress in our technology to, to ease ordering for our customers. So therefore, with that business, you know, between carryout and in-restaurant, there's a lot of overlap, right? The customer either comes in to eat or does carryout. In delivery, especially third-party delivery, that's an incremental occasion, and we'll continue to invest heavily in that, and because that's a, that's a customer opportunity for us. Then, then finally, we're seeing that, the, the consumer loves our catering business. Again, it's an off-premise opportunity.
Carrabba's is leading the way in that, and they just developed their line of Sandwiches that I'm not going to get into details on it, but boy, it's being, you know, customers responding, and we think we've got an opportunity beyond catering, you know, in our restaurants. This is a, a great example of how an off-premise business can, can help an in-restaurant business, and the innovation we can use in other places in our business. It's clear the customer likes convenience, and we're there to deliver it.
Dennis Geiger (Senior Research Analyst)
Great. Thank you.
Operator (participant)
Our next question came from Andrew Strelzik from BMO Capital Markets. Please, sir, go ahead.
Andrew Strelzik (Equity Research Analyst)
Great. Good morning. Thank you very much. My, my first question is about Carrabba's development. Within your, kind of optimistic, unit growth outlook that you've talked about o-over the coming years, you know, it's really Outback and Fleming's driven, which has been very consistent. W-what would it take for Carrabba's to play a more meaningful role, especially given the off-prem and, and catering, you know, kind of, and, and the optimism you talked around there? I would think maybe new formats or markets. I don't, I don't know if you think there's more of an opportunity there. Any color would be great.
David Deno (CEO)
Yeah, there's an opportunity in Carrabba's. I generally don't like to go public or anything till we have a pipeline built, and I can talk about some more. There's an opportunity with Carrabba's, clearly. The performance has been terrific. The team's doing a great job. Until we build the pipeline a little further, it's something that, you know, I'll continue to hold back on a little bit, but certainly, we're looking at it and thinking about it. Having said that, the pipeline at Fleming's Brazil and Outback is filling up every day and looks very strong. More to come on, on development, but Carrabba's certainly earned the right to more expansion.
Andrew Strelzik (Equity Research Analyst)
Okay, great. My other question was just on competitive activity within the category. I mean, what are you seeing? Does it feel still pretty rational? I guess with most expecting pricing to roll off, you know, any, any concern that, you know, there might be more, you know, kind of overt traffic-driving efforts across the category and what that might mean? Thanks.
David Deno (CEO)
In the categories we play in, it's been very rational. We certainly don't want to, you know, do any discounting and things like that. We intend to build value other ways, like we've talked about on this call. It's been a very rational environment in our section of the business. Other parts, I don't really want to comment on because we don't really play in those areas. It's been a very rational way about going to business.
Andrew Strelzik (Equity Research Analyst)
Great. Thank you very much.
David Deno (CEO)
Thank you.
Operator (participant)
There is no further question at this time. I should like to turn the floor back over to Mr. Deno for closing comments. Please, sir, go ahead.
David Deno (CEO)
Thank you, everybody, for listening, and your interest in our business, and we look forward to talking to you in October in our Q3 call. Take care.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a nice day.