Bloomin' Brands - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to the Bloomin' Brands Inc. third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Tara Kurian, Vice President, Corporate Finance and Investor Relations. Please go ahead.

Tara Kurian (VP of Corporate Finance and Investor Relations)

Thank you, and 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 third quarter 2023 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 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 third quarter 2023, an overview of company highlights and current thoughts on Q4 and fiscal 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I would like to now turn the call over to David Deno.

David Deno (CEO)

Well, thank you, Tara, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q3 2023 diluted earnings per share was $0.44. This compares to $0.35 in Q3 2022, reflecting a growth of 26% year over year. Combined U.S. comp sales were down 50 basis points and traffic was 60 basis points behind the industry. Following Labor Day, sales trends in the casual dining industry softened. From August to September, there was nearly a 300 basis point decline in comparable sales trends. Our brands experienced a similar change in trend. Despite these top-line headwinds, we had 90 basis points of restaurant margin expansion versus last year, driven by our productivity initiatives. As a result, our Q3 profitability remained strong.

Moving forward, although the industry landscape has changed from earlier this year, we expect U.S. comp sales to improve sequentially in Q4 from Q3. We have already seen an improvement in October, and this is incorporated within our Q4 guidance. In the long term, we are committed to the strategic priorities that are making us a stronger, leaner, operation-centric company. These priorities include, first, driving in-restaurant same-store sales growth, and this is our top priority. Second, increasing new restaurant openings while refreshing our existing assets. Third, maintaining our off-premises momentum. Fourth, becoming a more digitally driven company. And finally, investing in technology to drive growth while preserving margins. Since 2019, we have made great progress on improving our operating model through simplification efforts and by leveraging investments to improve efficiency. The efforts have resulted in strong margin gains that have sustained despite record inflation.

These achievements also provide a strong foundation for the exciting growth ahead, and we have confidence that these priorities will enable us to drive sustainable long-term sales and profit growth. In addition, our investments in the customer experience in both restaurant technology and operational simplification allow us to provide differentiated guest experience that strengthens our value proposition. Many of these investments have been made across the entire portfolio, but the primary focus has been at Outback. With a strong operating foundation and healthy margins, improving in-restaurant sales and traffic is our top priority. As the economic and consumer landscape continues to evolve, we are making sure we continue to evolve with it. This includes doing the work to ensure we exceed the needs of our existing and future customers. This ongoing effort is always being done through the lens of the consumer and customer analytics.

A few quarters ago, we discussed our No Rules, Just Right campaign that built on Outback's brand equity and heritage. But this is more than just marketing. It's an attitude. It's how we reenergize our restaurants and bring back the irreverence that Outback is known for. We'll be spending more on marketing and advertising in Q4 as well as 2024. Although we do not intend to return to pre-pandemic levels, we do believe a higher level of advertising spend is warranted moving forward. Utilizing a blend of television and high-return digital tactics, we believe our increased marketing presence can help build traffic. We will leverage a combination of new product innovation, highlighting our already accessible price points. For example, our current LTO at Outback, the Steak 'N Mate's $16.99 Combo offering, provides a great value to the guest and an attractive return.

We recognize in the short term that driving traffic growth may be challenged as the consumer is more careful with their discretionary spending. We'll be thoughtful about our approach to discounting in this environment. Another catalyst for growth are the investments we are making to enhance our operations at Outback. At the end of the third quarter, we completed the rollout of our server handheld technology and the advanced grills and ovens. These investments are improving our consistency, overall meal pacing, and guest satisfaction, while also providing a cost-saving opportunity for the company. Now our focus is leveraging this technology to further improve the guest experience. This will lead to increased intent to return metrics, which drive additional guest frequency and traffic growth. We are confident in the strategy at Outback and are making the necessary decisions to set up the brand for the long term.

We'll remain disciplined in our response in this environment and look forward to updating you on our progress in the future. As it relates to the broader strategic priorities for the company, let me first talk about development. We are upgrading our assets to remodeling, relocating, and opening new restaurants, especially at Outback. On our remodeling efforts, we are at the beginning of a multi-year effort and remain on track for 100 remodels this year. In terms of relocations, at Outback, we continue to see upside sales lift with average volumes exceeding $4.7 million per year. The success of our relocation program reinforces the broad consumer appeal of Outback, and there are still another 50 relocation opportunities remaining. The new restaurant pipeline continues to build at Outback and across the portfolio, and we are seeing good returns on new units.

Our development efforts provide the runway for future growth and are a critical part of our strategy. Complementing this strategy is our leading off-premises channel. This business has more than doubled since 2019 and currently represents 25% of our U.S. sales. As pioneers in to-go, we continue to have robust demand and are maintaining strength in third-party delivery. This is a highly incremental occasion and is differentiated offer that is profitable. In addition, the success of our catering business, particularly at Carrabba's, provides a runway for future growth. Before I turn it over to Chris, I want to comment on a couple of specific businesses that are doing very well. First, Carrabba's had another excellent quarter with comp sales of 3%. The off-premises and catering channels are proving to be very robust.

Off-premises is 34% of Carrabba's sales, which includes a strong contribution from our growing catering business. Carrabba's has the perfect menu to meet the demands of this important and growing channel. We launched Carrabba's Bistro earlier this year, which is a lunch-focused catering option featuring a wide variety of sandwiches that represent Carrabba's Italian heritage. This continues to outperform our expectations. Off-premises will continue to remain a large part of the company in the future. Additionally, Carrabba's continues to offer innovative product offerings such as the wine dinners and seasonal specials, which highlight the great value and experience that this brand is known for. The strong sales at Carrabba's, combined with productivity initiatives and cost management. Our financial returns continue to get stronger. Carrabba's has earned the right to grow, and we've started to build out a pipeline for future restaurant openings.

Next, our international operations, driven by our market-leading business in Brazil. Brazil had another outstanding quarter with significant growth in sales and profits. The Brazil team offers amazing food and exceptional service, and we continue to rapidly expand the business throughout the country. We look forward to capitalizing on our leading position and double our restaurant footprint in the coming years. Importantly, the sales growth initiatives that I described are supported by a solid foundation with healthy margins, robust cash flow, and a strong balance sheet. This strength gives us the ability to invest in new unit development, technology enhancements, and asset improvements while meeting our commitments. We remain dedicated to delivering great food and experience for our guests while building a strong business that will continue to thrive for many years to come.

Finally, our results would not be possible without our great teams in the restaurants and in our restaurant support center. Thank you for delivering on outstanding hospitality and service to our guests. With that, I'll now turn the call over to Chris, who will provide more detail on Q3 and our thoughts on Q4.

Chris Meyer (EVP and CFO)

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2023. Total revenues in Q3 were $1.08 billion, which was up 2% from 2022. This was primarily driven by revenue generated from net restaurant openings, the Brazil tax exemption, as well as favorable foreign exchange translation. Consistent with the broader casual dining industry, we saw a sizable change in traffic trends coming out of Labor Day, and September was softer than expectations. As such, U.S. comparable restaurant sales were down 50 basis points in Q3. Average check was up 4.2% in Q3 versus 2022. As we mentioned on our last call, menu pricing is rolling off, which is translating into lower average check as we move throughout the year.

This will continue in Q4, as we do not intend to take significant additional pricing for the remainder of the year. The softer industry backdrop suggests we must remain disciplined on future pricing actions to maintain proper balance in our price-value equation. At approximately 25% of U.S. sales, Q3 off-premises increased 70 basis points from Q2. Importantly, the highly incremental third-party delivery business remains healthy and was flat at 12% of U.S. sales. As it relates to other aspects of our Q3 financial performance, GAAP diluted earnings per share for the quarter was $0.45 versus $0.34 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.44 versus $0.35 of adjusted diluted earnings per share in 2022. Adjusted restaurant-level operating margins were 14% versus 13.1% last year.

Domestically, the benefits from our pricing and productivity initiatives continue to offset inflation. The technology we are putting into our restaurants is having an increasingly positive impact on our margins, and the overall levels of inflation moderated somewhat in Q3 versus the second quarter. As it relates to inflation, commodity inflation was up 2% in Q3. We had favorability in produce, dairy, and seafood, which helped to lower the overall inflation levels. We do expect commodities to be closer to 6% in 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 4.9%. Labor continues to be in line with our full year guidance expectations of mid-single digits. Restaurant operating expense inflation was 5.2%. This is consistent with our expectations for the year.

Also worth noting as it relates to restaurant margins, international segment restaurant margins were up 130 basis points. This was driven by the continued growth in our Brazil business, despite a softer consumer environment. We also continued to benefit from the Brazil tax exemption in Q3, but as a reminder, the Brazil tax benefit will go away starting in the fourth quarter. Total company adjusted operating income margin was 5.3% in Q3, compared to 4.9% in 2022. Depreciation expense was up in Q3, consistent with our increased levels of capital spending and our investments in infrastructure to support growth. Overall, we remain focused on maintaining the progress we have made in margins since 2019. In Q3, we were 300 basis points above our Q3 2019 adjusted operating income margin.

Turning to our capital structure, total debt was $795 million at the end of Q3. Our current balance sheet net leverage ratio is 1.3x, and our current lease-adjusted leverage ratio remains below 3x. In terms of share repurchases, year to date, we have repurchased 2.4 million shares of stock for $61 million through the end of October. We still have $79 million remaining on the new authorization that the board approved on February 7th. The board also declared a quarterly dividend of $0.24 a share, payable on November 29th. We believe our free cash flow allocation is balanced and will continue to deploy dollars against additional debt paydown, share repurchases, and our dividend. Now turning to our 2023 and Q4 guidance.

First, we are adjusting our full-year 2023 guidance to account for the softer industry backdrop. We expect full-year U.S. comparable restaurant sales to be approximately 1.5%-2%. This is on a 53-week comparable basis. Adjusted earnings per share are expected to be $2.80-$2.90. This change in guidance is primarily driven by the reduction in U.S. comp sales. We are lowering our full year tax rate assumption in conjunction with the lowered earnings, to be between 10% and 11%. Capital expenditures are now expected to be between $260 million and $280 million, as we've been able to pull forward costs associated with 2024 projects. All other metrics remain the same as we communicated during our February 16th earnings release.

As it relates to the fourth quarter, trends in October have improved from the September softness. As such, we expect U.S. comparable restaurant sales to be flat to 1%. This reflects a 14-week to 14-week comparison. We expect Q4 adjusted earnings per share to be between $0.64 and $0.74. In summary, we successfully navigated a challenging environment in Q3. We will remain disciplined in executing against our strategy in Q4, and we will emerge a better, stronger, operations-focused company. With that, we'll open up the call for questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein (Managing Director and Equity Research Analyst)

Great. Thank you very much. Two questions. The first one, Dave, you mentioned a comp slowdown, I guess, post-Labor Day, but perhaps maybe a little bit of a bounce back in October. I'm just wondering if you can maybe assess what you attribute that to. I feel like we've heard three different theories. One, just the consumer headwinds that are finally taking hold, which perhaps led to that slowdown in September, but then the bounce back being a return to more seasonality, versus just the fact that everyone's lapping price, and therefore, the comp is optically slowing. So I'm just wondering how you think about that slowdown and then modest recovery.

Is it really the consumer is a lot weaker now, or would you attribute it more to seasonality, and therefore, we're in a better place with the consumer still in relatively good shape?

David Deno (CEO)

Yeah. Hi, good morning. We view it primarily as seasonality as we look at just the history. Obviously, we've got to keep track of various macro headwinds that are out there, you know, student loan repayments, interest rates, et cetera, but there's some seasonality there, but also importantly, you know, what we're doing as a company, right? And the offers that we have and what we're doing, and we talked about the uptick in September, and we feel good about November and December as well, and that's in our guidance. So we think the consumer is in a decent spot, but we think it's primarily a return to, you know, seasonality as looked at historically.

Jeffrey Bernstein (Managing Director and Equity Research Analyst)

Got it. When you say the softer industry backdrop to close the year, it's not so much the consumer per se, although you're watching it, but it was just more like seasonality that led to that dip in September rather than some sort of consumer weakness.

David Deno (CEO)

You know, we're watching the consumer very closely, but certainly seasonality in September is what we primarily think. And as we look at going forward for the rest of the quarter, we feel good about what our programs and where we're going to stand, and we've tried to incorporate that in our guidance, that bounce back.

Jeffrey Bernstein (Managing Director and Equity Research Analyst)

Understood. And then could we directionally look out to next year? I think, Chris, you said that, you know, your guidance for commodities and labor and restaurant expenses this year were all kind of mid-single digit, and you took some, some pricing to mitigate that. But how do you think about that going into to next year? One, would you expect inflation to maybe moderate across those lines, even if you don't have specific guidance?

And how do you think of that relative to menu pricing, because if there is a slow on consumer backdrop, some would say, don't take enough price to fully offset the inflation, maybe take a hit to margin, but preserve traffic. So how do you think about that theoretically, in terms of directional inflation for next year, and how you think about price? Will you offset the inflation or let it hit the margin in the short term?

Chris Meyer (EVP and CFO)

Yeah. Good morning, Jeff. Conceptually, our formula is pricing plus productivity offsets inflation. So I think that, you know, candidly, it's probably a little early to speculate on where inflation is going to level out next year. You know, obviously, we don't. We've talked about this, you know, in prior years. We don't finalize our beef outlook until December, so it's probably too early to give us a read on 2024 commodities. But look, anecdotally, outside of beef, things are looking pretty rational across the basket, which I think is a good sign. Beef is a little bit of an unknown. We're still seeing the same information as everyone else out there. Overall, beef production remains a challenge.

But other than that, you know, there isn't too much to say at this point other than, you know, we, as a company, have repeatedly shown the ability to navigate these markets as good as anyone else out there. So we'll monitor that. We'll be sure that we have productivity initiatives in place because we do have a good amount of rollover from our productivity that we put in place this year, and we've got a lot of new ideas for next year, potentially as well, that can help offset. And what that does is that does reduce the need to take as much pricing as you would normally need to take to offset that inflation.

Because we're look, we're obviously, we're pretty mindful of where the consumer is, and we do believe that going in with a mindset to keep the pricing as low as possible is the right place to be. Now, in terms of labor and how that plays in, look, labor has been pretty consistently inflationary for a number of years now. Now, look, it's come down a little bit as the year progressed. I think every quarter, it's come down a little bit from where it was, certainly where it was last year. But look, it wouldn't surprise me at all if we're still talking in that, you know, low single to mid-single digit kind of inflation range, just sort of into perpetuity.

David Deno (CEO)

Hey, Jeff, just one thing I want to add. You know, we've been really careful about our price increases, and if you look at our comp breakdown, and we've got a 4% change in PPA in Q3, and, you know, that's, that's pretty disciplined, versus what's going on elsewhere in the industry. So I think we're really trying to make sure that our price value equation, as we continue to improve service and food, especially at Outback, comes together to help grow traffic.

Chris Meyer (EVP and CFO)

Well, and just to piggyback off of that, if you look at our Q4 guide, that does imply that your check average is going to be in that 2.5%-3% range, which again, as we've indicated, we do expect that check average to tick down as the year progresses, and we're going to see that again in Q4.

Jeffrey Bernstein (Managing Director and Equity Research Analyst)

Understood. Thank you.

Operator (participant)

The next question comes from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle (SVP and Equity Research Analyst)

All right, thanks. Good morning. As you look across your brands and think about what it really takes to win market share in casual dining and drive traffic out performance, and Carrabba's performance really stands out, and I'm curious how much of that is related to the specific category dynamics versus more fundamental execution elements. To the degree there are executional aspects that are driving that success, are there bigger, more impactful actions that you think you need to take it Outback to deliver the kind of experience that translates into more visible traffic share gains? I know some of that will come still with the equipment and technology recently deployed, but just interested in your thoughts there.

David Deno (CEO)

Yeah, good morning. I'll start with Outback, and we'll move to Carrabba's. You know, if you look at Outback and traffic, there are three or four things that are crucial. And the very first thing, which is our top priority, is our restaurant operations, in-restaurant operations, and leveraging our technology investment and providing that great customer experience with very interesting food and service. So that's job one. Our operating metrics are improving, and we're leveraging our technology, and we'll continue to stay razor-focused because that's a big way of growing sales at Outback. We are going to spend more on media because we've got some really great ideas that we like, and you'll see that in Q4, and we'll see that going into 2024.

Chris has talked about our initiatives and productivity to help, you know, pay for some of that as we look to do the magic of the and, grow traffic and preserve margins. We want to make sure that we remodel and update our Outback restaurants to make sure that the consumer is getting that type of experience. We talked about our remodel program. And then finally, as we talked earlier about our price value equation and being very mindful about our price increase. And then we've got a really great off-premises business that we've got to continue to grow and leverage. Carrabba's is just doing extremely well on the off-premises business, especially, but also in some of their in-restaurant experiences.

Their margins are improving, and like I mentioned in the script, they earn the right to grow, and we're looking to build that pipeline as we move forward. So Carrabba's has done a great job, and I think what's helped them also is they have a really strong off-premises business. That doesn't mean that they're not focusing on in-restaurant dining, but they have a really strong off-premises business that they're continuing to leverage.

Alex Slagle (SVP and Equity Research Analyst)

Thanks. And had a follow-up on the other restaurant operating expense line. It was up quite a bit this quarter and feels like it's one place that has seen less of a relative improvement over the years versus the peers and relative to the big gains you've made in food and labor. And realize, you know, much of this has to do with your ability to drive volumes and leverage here, but are there opportunities to explore, to be more efficient or to better leverage your scale here?

Chris Meyer (EVP and CFO)

Yeah, no, I think, absolutely. You know, certainly the productivity initiatives that we have in place this year have been highly focused on cost of goods sold and labor, not as much focused on the restaurant operating expense line. But I think that areas such as to-go packaging, supplies, things like that, are areas where you could tap into potentially get more efficiency on the restaurant line. And then, you know, again, I think that to your point, that this quarter, in particular, was more just a product that we didn't have the same level of productivity in that line as you saw in COGS and labor, and that's why we weren't able to leverage that line as effectively as we were the other lines. And you also had a tick up a little bit in marketing.

Alex Slagle (SVP and Equity Research Analyst)

Got it. Thanks.

Operator (participant)

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia (Group Head–Consumer)

Hi, good morning. I know you've been seeing negative mix shifts, for a number of reasons, but I'm curious if you started to see that abate or level off in the third quarter or into the fourth quarter? And then, as you're thinking about guidance for this quarter, I know you didn't quantify how October is doing, but I'm very cognizant of you, lapping Elliott later in the quarter. So, does the guidance take into account kind of a potential uplift as you lap Elliott, or are you just kind of putting guidance out there that's similar to where the current trend is?

Chris Meyer (EVP and CFO)

Yeah. So I'll start with the mix piece, and then we'll move on to the traffic assumptions for Q4. You know, menu mix was down. If you start with Q3, it was down over a little over 2% in the quarter, and that's pretty consistent with what we saw in Q2. There's a piece of that we've talked about, we think is consumer trade, app mix, and alcohol mix are a bit lower. But the majority of that negative mix has to do with revenue center shifts, which have been engineered, right? So we know these areas have such as catering, et cetera, they carry a lower check average, which has been highly influencing the mix in our numbers.

Now, the good news is that you start to transition to Q4, we get the benefit of starting to lap some of the negative mix trends that we started to experience late last year. So as such, I do think we expect mix to moderate some in Q4. It'll still be down, but probably down closer to the 1%-1.5% range versus the 2% range that you've seen the last couple of quarters. Now, as it relates to traffic and the traffic assumptions and what would be embedded in the guide, I think... Look, so the way to think about it is, first, we've seen the improved trends in October from where we were in September. That's built in. Second, we're lapping a fairly soft November from last year, which we did call out in our Q4 call.

We do get the benefit of lapping that, so that's built into the guidance as well. Third, there is an increased marketing presence that Dave talked about. We're not going to give the exact dollar amount for competitive reasons, but that is also built into the guide. And there is a favorable holiday shift, right? From the timing of Christmas holiday. It works in our favor. And why that's a little more impactful for us than maybe some others is that our brands do tend to skew a little more special occasion. So that is going to have a little more of a positive impact in Q4 than maybe it might for some others. In terms of the Winter Storm Elliott, I think our approach is we can't really predict weather.

We know we're going to be lapping Winter Storm Elliott, you know, in Q4. That's, you know, that's really not contemplated extensively in the guide because it's just as likely that you're going to have some things go the other way as well.

Sharon Zackfia (Group Head–Consumer)

Yeah. I'll hope for a good winter. Thanks.

Operator (participant)

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe (Managing Director and Equity Research Analyst)

Hi, thank you. You know, there's, you know, I guess a lot of discussion about, you know, kind of taking Outback, you know, as a brand back to its maybe its peak, which we could argue maybe was in the early to mid-nineties. I mean, where, you know, it really was a, you know, very different brand, very high average unit volumes, dinner only, in some cases, three hours kind of line, you know, lines. I mean, it was a concept that really had a lot of excitement, you know, and, and just like the American, you know, populace, including, you know, your own staff.

And, you know, obviously, No Rules, Just Right is kind of part of that, and I understand that you kind of want to bring Outback back to some of that energy and even bring the Outback U.S. business, you know, maybe back to, you know, what, you know, what Brazil is today and, and presumably will continue to be. So long setup to the question. Now, I maybe I'm embarrassed to say, but I do remember that in the mid-1990s, as you know, starting as an associate. And, you know, Outback was always a transaction-driven model at that point. In other words, you know, the money was not really made on margin. It was just made on pure customer counts of the exceptional value that was given to customers.

And being dinner only, of course, the PPA was higher and higher alcohol mix and some other things, and it was a higher margin business, you know, than being for lunch. So the question that I'm asking, you know, is, you know, do we have an opportunity to kind of get back to that transaction-driven model? And if so, might major price investments, you know, kind of be made, you know, at the Outback business, as you basically sacrifice gross margin and you sacrifice, you know, kind of, you know, your prime costs in order to just bring more customers to get back into the store over time?

In other words, do we have an opportunity for maybe doing kind of a major brand and price reset of just kind of reestablishing, you know, Outback more from a perception of value, you know, for the customer that arguably it was, you know, 25 years ago? And hopefully it's an okay question, Dave. Thank you.

David Deno (CEO)

Yeah, fine. I think clearly, John, you know, we agree with you on getting the irreverent fun service into the business, and we're working very hard to do just that. We talked on prior calls that one of our leading executive in Brazil is here to help with our marketing efforts, and he's gonna, you know, he's doing a fabulous job here. So that's part one. Part two is the service and food elements that are going to win the day for us.

And so making sure our service metrics are. You've seen the investment in our food, John. We're investing in remodels. We're going to be very, very, very conscious of price changes at Outback, you know, which we talked about earlier in the call today. So getting that price value back, and, and price value is not just price, it's the value you provide the customers in service, in food, while being very thoughtful about, the type of price increases you take. Now, if you look at within the menu itself, there are some really attractive price points, like combo meals and like the offer we're doing right now, our Steak 'N Mate Combo.

So I think if we bring back the fun and near reference, as we continue to do that, continue to improve our service levels, we've invested in the food, we've invested in technology, we're investing in our assets, we can move forward and push forward with transactions. Now, as far as lunch goes, that's a very important part of our business, and I think we'll continue to offer that. But on the dinner occasion, that's exactly where we're going.

John Ivankoe (Managing Director and Equity Research Analyst)

Thanks for that, Dave.

David Deno (CEO)

Yeah. Thank you, John.

Operator (participant)

The next question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

Jeff Farmer (Managing Director)

Great. Great, great, great, great, great, great, great, great.

Operator (participant)

We'll go to the next question. Yes, we are. We'll go to Sara Senatore from Bank of America. Please go ahead. Sorry about that.

David Deno (CEO)

No problem.

Katherine Griffin (VP and Equity Research Analyst)

Oh, hi, thank you. This is Katherine Griffin on for Sara. Thanks for the question. First, I wanted to ask just about the kind of casual dining, maybe Italian category, specifically. As it relates to Carrabba's, just can you talk about any sort of additional sales layers, whether it's day parts, menu items that you're contemplating in order to, you know, catch up with some of the public company peers that seem to be outpacing the brand? Thank you.

David Deno (CEO)

Well, I think, Carrabba's is doing quite well, so I'll take, if you don't mind, a little exception, on that. But, so I think we have a lot of white space for development, and I think, we got to be careful about, you know, adding menu items and adding complexity in the restaurants because we want to continue to drive the service and drive it forward. But we think there's white space in development. There's a chance to continue to improve our operating metrics. There's a very strong off-premises business there. There's another sales layer in our catering business, which is very easy to do because we can prepare that food in the morning and get that ready to go for our lunch business. So that sales layer is there.

Continued innovation in the restaurants with Carrabba's is there. Our off-premises business, which is doing so well, is there. And then our new units in white space that we have it with that with Carrabba's is going to be also an opportunity for us. So it really is performing well and is a growth vehicle for us going forward.

Katherine Griffin (VP and Equity Research Analyst)

Okay, thank you. Then I guess maybe just a follow-up then on Carrabba's. Just as we think about sort of the return to normal seasonality trends, what does that mean in terms of your expectations, for, you know, Carrabba's catering business, this holiday season?

David Deno (CEO)

That is certainly our hope. We've tried to incorporate that in our guidance, but we are very without getting ahead of my skis here, we're, you know, we're very bullish on what the catering business and what the off-premises looks like at Carrabba's. And we've seen sales levels that are just terrific. So it's early days. I don't want to get ahead of it, but the team has done a great job, you know, growing that business.

Katherine Griffin (VP and Equity Research Analyst)

Thank you.

Operator (participant)

Again, if you have a question, please press star, then one. The next question comes from Brian Vaccaro with Raymond James. Please go ahead.

Brian Vaccaro (Managing Director of Restaurants)

Hi, thanks, and good morning. I guess I wanted to start on Outback specifically. And it seems like the brand's traffic relative to industry trends softened a bit in the third quarter. I guess it depends on what indices you want to compare to. But would you agree with that assessment? And if so, I guess curious what you would attribute that to. And can you also just clarify on October, it seems like the year-on-year casual dining comps have improved by, say, roughly 300 basis points or so versus September. Has Outback seen a similar level of sequential improvement versus September?

David Deno (CEO)

Yeah, to answer the second question, we don't want to get into monthly comps per se, but again, we have seen a nice trend change in October, and it's incorporated in our guidance. As far as Outback goes, they do overlap, and this is where we've really got to be careful in managing this brand for the long term. They do overlap with some competitors that have had some pretty significant discounting and promotions, and we do not want to offer some of those deep discounts to drive traffic. We'd rather get back to some of the things we talked about earlier in the call in driving great service, great food at a great price point.

And we want to offer, you know, some very interesting LTOs like the one we have right now, but at the same time, to go into some, you know, deep discounting, Brian, I think, you know, for the short term to make some short-term goals would not make a lot of sense. So we're going to focus on the things that we talked about today.

Brian Vaccaro (Managing Director of Restaurants)

Okay, all right. Thank you for that. And Chris, on the marketing spend, what was the marketing spend in the third quarter? And could you ballpark the level of spend you embedded in your fourth quarter guidance?

Chris Meyer (EVP and CFO)

Yeah. So if you look at, so marketing was up about, I think, $2.5 million in Q3, put us at about $31 million on the quarter. Q4, we're not going to quantify the amount that we are going to increase the spend, but I think the base for Q4 is about $24 million from last year.

Brian Vaccaro (Managing Director of Restaurants)

Okay, and the $2.5 million, is that up year-on-year?

Chris Meyer (EVP and CFO)

Yeah, year-on-year. You know, and that's, that's primarily in the U.S., Brian. And there's actually an additional increase in Brazil. But, you know, $2 million of the $2.5 million that we see here in the U.S. in terms of increased marketing spend is Outback. And then there's another couple million dollars in Q3 that Brazil was actually up year-on-year.

Brian Vaccaro (Managing Director of Restaurants)

Okay, thank you for that. And, Dave, you just sort of mentioned it, but more broadly, you know, I think you've increased the spend through the year at Outback, like you just said, in the quarter and even maybe in Q2. But you've increased the spend, and the traffic doesn't seem to yet be responding. So I guess, what gives you confidence that a higher level of spend can break through, so to speak? And, I understand you don't want to get into deep discounts, but is part of the answer that you need some price levels on certain LTOs to move a little lower to gain traction in this current environment? It seems like your LTOs have maintained upper teens, if not into the twenties. Is that just too high of a price point in the current environment?

David Deno (CEO)

We've got a great steak offer right now for $16.99, which we think holds a lot of promise, and it's been tested well and researched well. And we have other ideas like that, that we want to spend behind. But importantly, importantly, when you couple that with the food investments we've made and the service, that we're going to continue to drive service improvements, we're going to continue to drive, which we're seeing, that will help drive traffic, but over the long term. But we have taken a look at some of our LTOs, Brian, and gotten to those, that kind of price point I'm talking about.

Chris Meyer (EVP and CFO)

Yeah, and the only thing I would add to that is that, you know, just in terms of deep discounts, and again, you can still use LTOs and you can use price points and LTOs, but I don't think we believe that deep discounting is where Outback plays in the spectrum of casual dining. It's a steak-centric model, higher price points. It doesn't lend itself, you know, necessarily to pursuing a customer cohort that's, you know, heavily motivated by couponing. We'll use the LTO strategy, like Dave said, to keep value front and center.

Some windows may be more aggressive than others, but as a general strategy, we're focused on maximizing the price value equation, like Dave said, through exceptional food service and ambiance at a price point that our guests are comfortable with.

Brian Vaccaro (Managing Director of Restaurants)

All right, great. And then last one for me, just on the new tech and equipment package rollout. I wanted to confirm, is that now rolled out to all Outbacks at this point? And could you elaborate on how it's benefiting operations and maybe quantify any of the important metrics like ticket times, table turns, cost savings, you're seeing in some of the stores that are fully ramped on it and efficient?

David Deno (CEO)

Yeah, I'll talk about some of the service elements, and then I'll, Chris, if you want to follow up on anything on the financial side. You know, we're excited about the financial benefits of the equipment, but for me and for our company, it's the service and food that's really going to help. And so like steak accuracy, right? That's the number one thing in the restaurant, in the steak category. You know, improving steak accuracy for our customers, and the grills certainly help with that. And that's been embedded and rolled out, and we're seeing improvements there. Certainly, service attentiveness, because we have the servers on the floor at all times because they don't have to toggle back and forth to enter the information.

That's also extremely important and another measure that we're looking at very carefully. So those are just two examples, Brian, from an operating standpoint that we're looking at. Obviously, table turns will help, too, but we don't want to push the customer too fast. But the service, the measure and the steak accuracy measure is extremely important for us, and I'll turn over to Chris for any other financial comments.

Chris Meyer (EVP and CFO)

Well, yeah, the only thing I would say is, when we started this year, we targeted, like, $50 million of productivity benefits for the year. We've actually had to increase that number. We're up closer to $55 million for the full year, and a lot of that increase is due to the fact that we're seeing very strong effectiveness of the technology that we're putting into the restaurants. In terms of benefits, again, a lot of the $50 million is incorporated in that. You certainly are seeing improved ratios of servers to tables. In terms of the front of house technology, that's driving benefit financially. In the back of the house, we've effectively reduced the amount of recooks that you know to a very, very record low number.

Our food waste is now at a record low number. So, look, this whole package really works. It really helps, you know, benefit the entire P&L. But importantly, looking just beyond just the productivity aspect of this, Brian, I do believe that, again, when we talk about building a business that is maximizing the price value equation with exceptional food, service, ambiance, et cetera, all of these investments are not just layers to drive productivity, but they are also layers to drive future guest frequency. When you have a great ex- it's not, this business, as we learn time and time again, is not that terribly complicated. When you provide excellent service at a great value to a guest, they want to come back, and that's what this technology really, at its core, is designed to do.

It does take time to see, given the kind of the amount of frequency that our guests come into the restaurant, that takes time to show up in traffic. But boy, I'll tell you, it certainly is something that we're confident that will build traffic over the long term.

Brian Vaccaro (Managing Director of Restaurants)

All right. Thank you very much. I'll turn it back over.

Operator (participant)

Those are all the questions we have for today. I would like to turn the conference back over to David Deno for any closing remarks.

David Deno (CEO)

Thank you, everyone. Thank you for attending the call today, and we look forward to talking to you on our Q4 call. Have a great day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.