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Edited Transcript of DRI earnings conference call or presentation 28-Mar-17 12:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Darden Restaurants Inc Earnings Call

ORLANDO Mar 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Darden Restaurants Inc earnings conference call or presentation Tuesday, March 28, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eugene I. Lee

Darden Restaurants, Inc. - CEO, President and Director

* Ian Baines

* Kevin Kalicak

* Ricardo Cardenas

Darden Restaurants, Inc. - CFO and SVP

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Conference Call Participants

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* Andrew Strelzik

BMO Capital Markets Equity Research - Restaurants Analyst

* Brett Saul Levy

Deutsche Bank AG, Research Division - VP

* Brian Michael Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* Brian John Bittner

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Christopher Thomas O'Cull

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* David Palmer

RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Analyst

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Howard W. Penney

Hedgeye Risk Management LLC - MD

* Jake Rowland Bartlett

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Jason Taylor West

Crédit Suisse AG, Research Division - Senior Analyst

* Jeffrey Andrew Bernstein

Barclays PLC, Research Division - Director and Senior Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* John W. Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Karen Holthouse

Goldman Sachs Group Inc., Research Division - VP

* Matthew James DiFrisco

Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Samuel John Beres

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Stephanie Ng

* Stephen Anderson

Maxim Group LLC, Research Division - SVP and Senior Restaurant and Consumer Analyst

* Todd Jeffrey Duvick

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Will Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to the Darden Fiscal 2017 Third Quarter Earnings Call. (Operator Instructions) This conference is being recorded. If you have any objections, you may disconnect this time.

I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin.

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Kevin Kalicak, [2]

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Thank you, Rae. Good morning, everyone, and thank you for participating in today's call. Joining me on the call today are Gene Lee, Darden's CEO; Rick Cardenas, CFO; and Ian Baines, CEO of Cheddar's Scratch Kitchen.

As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed last night and in its filings with the Securities and Exchange Commission.

We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our website at www.darden.com.

Today's discussion and presentation include certain non-GAAP measurements, and reconciliations of these measurements is included in the presentation.

This morning, we will briefly review our results from the third quarter and discuss the Cheddar's transaction in more detail, both of which were announced last night via press release and filed with the SEC. After the prepared remarks, we'll open the call for your questions.

Now I'll turn the call over to Gene.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [3]

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Thank you, Kevin, and good morning, everyone. We appreciate you joining us today as we review our third quarter performance and share the exciting news of our acquisition of Cheddar's Scratch Kitchen.

Let me begin by saying that I'm pleased with our performance during the quarter. Total sales from continuing operations were $1.88 billion, an increase of 1.7%. Same-restaurant sales grew 0.9%, outperforming the industry benchmarks, excluding Darden, by 510 basis points. And diluted net earnings per share were $1.32, an increase of 9.1% from last year's adjusted diluted net earnings per share.

Olive Garden had another impressive quarter, achieving same-restaurant sales growth of 1.4%, outperforming the industry benchmarks, excluding Darden, by 560 basis points. This was Olive Garden's 10th consecutive quarter of same-restaurant sales growth, driven by our focus on operational excellence, which drove all-time guest satisfaction scores; continuing to meet our guests' needs for convenience with OG To Go; and providing compelling promotional and core menu offers, such as Never Ending classics and our Tastes of the Mediterranean platform.

LongHorn Steakhouse sales -- same-restaurant sales grew 0.2%, the 16th consecutive quarter of growth. I'm pleased with their results as the team continues to implement their long-term strategy focused on investing in quality and simplifying operations.

Our success and our ability to continue fulfilling our mission is due to our competitive advantages, our back-to-basics operating philosophy and our portfolio of differentiated brands. We believe our 4 competitive advantages give our brands an edge in the marketplace by enabling us to drive sales growth and expanding margins and they are: leveraging our significant scale to create cost advantages; using our extensive data and insights to better understand our guests and effectively communicate with them; ensuring our brands systematically go through our rigorous strategic planning process; and cultivating our results-oriented people culture to create a team that has passion to serve and a desire to win.

Our operating philosophy is the driving force behind the way our brand teams lead their restaurants. Though simple, this philosophy is powerful because it demands that we remain incredibly focused on driving strong operating fundamentals, and that means we're laser-focused on culinary innovation and execution inside each of our brands, delivering attentive service to every one of our guests and creating an engaging atmosphere inside all of our restaurants. And these priorities are supported by smart and relative integrated marketing programs that resonate with our guests.

All of this, our competitive advantages, our operating philosophy and our portfolio, brings me to the exciting announcement of our acquisition of Cheddar's Scratch Kitchen. When you look at all these things, it's easy to see why Cheddar's, a strong brand on its own, is an excellent fit for our company. The addition of Cheddar's to the Darden portfolio further enhances our scale. Our significant scale will provide meaningful synergies for Cheddar's, further strengthening an already robust business model. Additionally, being part of Darden provides Cheddar's the opportunity to leverage all of our competitive advantages to help increase sales and margins at existing restaurants and drive disciplined profitable new restaurant growth.

In addition to the mutual benefit realized through scale, we're also extremely confident about this acquisition because Cheddar's and Darden's are a cultural fit as well. We're focused on the same operating priorities. This focus on food, service and atmosphere has enabled Cheddar's to become one of the top brands in casual dining, one known for its high quality, made-from-scratch food at compelling prices and a polished, yet warm, atmosphere. We believe Cheddar's is a strategic fit for Darden for several other reasons.

First, it complements our portfolio and allows us to compete in the undisputed value leader and full-service varied menu category. This category remains sizable with evolving preferences that Cheddar's satisfies.

Additionally, Ian has built an experienced management team that encourages and empowers service-minded team members to be passionate and to bring their distinctive personalities to their roles, so they can deliver a personalized experience that is authentic and attentive.

Next, the restaurant level economics are very attractive. Cheddar's has average restaurant volumes of $4.4 million, average restaurant guest counts of approximately 6,300 guests per week and average check of approximately $13.50, all of which helps provide a strong return on investment. And with only 165 restaurants today, there's significant runway for growth.

And finally, Cheddar's is an incredibly strong brand. In fact, it is the undisputed leader on value perception and intent to recommend, which are both leading indicators of same-restaurant sales growth.

Now we'll turn it over to Rick, who will discuss the financial details of the quarter and this transaction.

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [4]

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Thanks, Gene. We delivered another strong quarter with diluted net earnings per share from continuing operations of $1.32, an increase of 9.1% from last year's adjusted diluted net earnings per share.

Looking at the P&L for this quarter. As a percentage of sales, food and beverage was favorable to last year related to commodities deflation of approximately 0.8% and continued cost savings. Restaurant labor was favorable, driven by lower manager incentive pay given last year's strong performance in the third quarter. This was partially offset by continued hourly wage rate inflation pressure.

Restaurant expenses were unfavorable due to higher-than-anticipated utilities inflation, particularly natural gas, increased preopening related to more second half openings this year than last, increased credit card fees and workers' compensation and public liability claims.

Marketing was unfavorable due to year-over-year timing and is flat on a year-to-date basis through the third quarter. G&A was favorable due to lower management incentives than last year as we wrap on a strong Q3 in fiscal 2016.

And finally, taxes were favorable due to year-over-year tax timing. Specifically, we had some tax favorability move into the third quarter this year that we had in the fourth quarter of last year.

Segment profit is now comparable to last year as the impacts of the real estate transactions are now in both year's results. This quarter, Olive Garden segment profit was below last year -- profit margin was below last year, driven by marketing expense timing, utilities inflation and higher preopening expenses related to Q3 and Q4 openings this year versus none in the second half of last year.

LongHorn segment profit margin was below last year, driven by higher restaurant expenses, primarily the workers' compensation expenses I mentioned. All other segments showed growth in segment profit this quarter.

Turning to our outlook in fiscal 2017. We increased our expectations for diluted net earnings per share from continuing operations to be between $3.95 and $4 a share. This assumes total sales growth of approximately 2.3% for the full fiscal year, same-restaurant sales of approximately 1.5%, commodity deflation for the full year, although we expect the fourth quarter to show slight inflation. Overall inflation of approximately 1.5%, driven by wage inflation for the year of approximately 3.5% to 4%. And finally, an effective tax rate between 25% and 26% for the year. So this implies fourth quarter results of same-restaurant sales between 2% and 3%, an effective tax rate of between 25% and 26% compared to approximately 21% in last year's fourth quarter and earnings per share between $1.11 and $1.16.

Looking ahead to fiscal 2018. I want to inform you that we will discontinue disclosing our monthly same-restaurant sales results in our quarterly releases beginning with the first quarter of fiscal 2018. This change is due to the significant variability in month-to-month sales results due to weather, promotional calendar shifts and holiday shifts, among other things, that generally result throughout a quarter.

In 2018, we anticipate total capital spending of between $360 million and $400 million, of which $150 million to $175 million is related to gross new restaurant openings of between 30 and 35, and the remainder, being related to approximately 100 Olive Garden remodels, ongoing restaurant upkeep, technology and other spending. The outlook for fiscal 2017 and the ranges for fiscal 2018 CapEx and new restaurant estimates exclude any impact from the acquisition of Cheddar's. Additional guidance for fiscal 2018 will be shared in next quarter's release and call towards the end of June and will include the impact of Cheddar's.

Regarding the acquisition of Cheddar's, we have signed a definitive agreement to purchase the company for $780 million in an all-cash transaction from private equity firms L Catterton and Oak Investment Partners. Net of approximately $30 million of certain cash tax benefits of deductible goodwill from Cheddar's purchase of a franchisee's assets in January 2017, this represents a multiple of 10.4x Cheddar's trailing 12-month adjusted EBITDA.

We will also pay the sellers $10 million for certain tax attributes related to their deductible transaction expenses. In addition, we will reimburse the sellers for capital expenditures they have made on new restaurants expected to open over the next 12 to 18 months. We expect to close the transaction before the end of fiscal 2017.

This addition to our portfolio will enable significant synergies due to the scale advantage Gene mentioned. We have a track record of achieving significant synergies with other transactions, with annualized run rate synergies on average of over 5% of revenues in prior acquisitions. This anticipated annualized run rate synergies with this transaction total $20 million to $25 million, representing approximately 4% of Cheddar's trailing 12-month revenues. We believe the $20 million to $25 million is both achievable and meaningful. And we expect to achieve this annualized run rate by the end of fiscal 2019, primarily through administrative and supply chain savings.

Given Cheddar's strong business model and meaningful EBITDA, we expect that this transaction will be accretive to our earnings per share by approximately $0.12 in fiscal 2018 and $0.20 to $0.25 in fiscal 2019, excluding acquisition and integrated-related expenses of between $25 million and $35 million.

We will fund this transaction with the proceeds of a new debt issuance and with cash on hand. This issuance is expected to be completed by the transaction closing date. Once the deal closes, our initial focus will be on integrating Cheddar's with minimal disruption to their operations and achieving the synergy estimates we've outlined. We have experience integrating brands from prior acquisitions and will apply learnings from those in this transaction.

As I mentioned earlier, we will provide greater detail on our outlook for fiscal 2018 in our earnings conference call in June. However, I want to wrap up by saying that the addition of Cheddar's to our portfolio gives us even more confidence in our ability to achieve our long-term value-creation framework we have discussed previously. We also intend to maintain our investment-grade credit profile.

In addition, the terms and structure of this transaction will put us more in line with our targeted leverage range of 2 to 2.5x adjusted debt to adjusted EBITDAR.

And with that, I want to welcome Ian and turn it over to him for a few comments.

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Ian Baines, [5]

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Thanks, Rick. Well, today is a really exciting day for the Cheddar's team, as this acquisition is the right next step for us as a brand. Being part of Darden, benefiting from the support structure and expertise in developing brands will enable us to reach our growth potential by opening up new opportunities that were previously out of our reach.

Additionally, it became evident during my interactions with Gene, Rick and the team and at Darden throughout this process that there are an incredible amount of similarities on how we run our restaurants and lead our teams. The cultural fit between both parties that Gene discussed will ensure a smooth transition for us and help us to stay focused on delivering exceptional experience -- experiences to our guests. We will be stronger because of Darden, and I am confident that we will make a meaningful contribution as part of the company.

Now I'll turn it over to Gene.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [6]

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Thanks, Ian. I just want to close by mentioning that this is the fourth acquisition that I have been a part at Darden, and I have been on both sides of the table. The process can be complex, but we have a seasoned team with a terrific system in place to ensure a smooth integration. I want to thank Ian and his team for the partnership they have given us through this process. And I want to welcome all our new team members from Cheddar's to the Darden family. We are committed to delivering against our mission, and I'm extremely excited to continue this journey with the Cheddar's team, who will strengthen what is already a very talented team at Darden.

And with that, we'll take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Brett Levy of Deutsche Bank.

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Brett Saul Levy, Deutsche Bank AG, Research Division - VP [2]

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Can you provide us a little bit more color on the Cheddar's P&L, what type of seasonality, how you're thinking about growth in terms of company or franchise, restaurant level margins? And also any thoughts on the near-term or the long-term -- near-term growth targets or the long-term unit potential?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [3]

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Brett, it's Rick. The restaurant P&L we mentioned is about a 17% restaurant EBITDA, which is strong in the industry, 4.5 -- $4.4 million AUV. They've got 25 franchises now. The revenues are fairly immaterial to the overall revenues for Cheddar's. And as we mentioned, we have a pipeline -- they've already got a pipeline of about 3 restaurants in this fiscal year and another 8 or so in the next fiscal year. I'd like to just close by saying, they've grown about 12%, 15% over the last 10 years. And we feel really confident of their continued growth.

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Brett Saul Levy, Deutsche Bank AG, Research Division - VP [4]

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Can you share anything about the comp cadence, what they're running -- what they generally run in terms of on an annual basis and the comp waterfall for new units as they come onboard?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [5]

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Brett, it's Gene. We're not going to comment on the comp performance historically. I will say that they're outperforming the industry at this time. And we'll give you some more insight in June once we get this deal closed.

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Operator [6]

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Next, we have Nicole Miller of Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [7]

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Maybe just bigger picture from Cheddar's, what might you deploy into your system in terms of their value proposition or positioning? Also maybe anything they're doing in technology, human capital or otherwise.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [8]

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Yes, we think there's a lot to learn from the value proposition. They are obviously the value leader. You saw the chart that we had in the presentation. They've had a long history of underpricing the industry, developing products from scratch, which enable them just to really deliver a high-quality product at a little bit lower price point. So I think there's a lot that we can learn from them about value. And as far as technology and human capital, I think there's a lot that we can share with them. We're excited to be able to help them with some of their back-of-the-house technology and some other process-oriented things that we've developed here at Darden that -- over the years, that they haven't had the opportunity to implement. And we think there's upside plugging them into our human resource systems. And we think we can help improve their team member turnover and retention.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [9]

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And just so everybody does have it, what is the approximate average check at Cheddar's?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [10]

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It's about $13.50.

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Operator [11]

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Next, we have Brian Bittner of Oppenheimer.

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Brian John Bittner, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [12]

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Just a big picture financial accretion question on the deal. You said the transaction will be EPS accretive in year 1 by about $0.12 and then expanding to $0.20 to $0.25 in year 2 or 2019. Is the difference in the accretion projections simply you're not assuming much synergies in the '18 number and you're assuming all the synergies in the '19 number? Or is there some type of growth that you're assuming out of Cheddar's?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [13]

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Yes, Brian. Thanks. We have more of the synergies coming in, in '19 than in '18, although we do expect some growth in Cheddar's in '19.

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Brian John Bittner, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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Okay. And then as far as the 2.3x EBITDAR, should we be assuming in our models that you're taking out around $500 million out of your credit facility that you currently have on tap to fund this? Or should we be assuming more?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [15]

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Yes. Well, what I'd start with -- if you look at our balance sheet right now, we've got about $390 million in cash. We're not going to talk about the way we're going to fund the debt other than to say we'll use some debt, whether it's credit facility or other things to fund this transaction. We expect to close that before the deal closes.

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Operator [16]

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Next, we have Greg Francfort of Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [17]

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Just one question on the EBITDA multiple. I know Cheddar's had a 44-store transaction happen earlier this year. Are you including those stores in the multiple -- in the EBITDA that you're using for the multiple?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [18]

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Yes, Greg. We are including them for pro forma for the full 12 months.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [19]

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Got it, got it. And just -- I know you guys have been testing loyalty in some markets. And is the strategy going forward to potentially acquire more brands and build out sort of a broader loyalty network? I guess, how do you think about how Cheddar's fits into sort of plans you're doing and what you're testing on the loyalty front?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [20]

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Yes, you're correct. We have a small loyalty test out there right now. And we're -- as we've said in the past, we're going to continue to go slow with that test. And how does Cheddar's fit into that? I think we keep coming back to our 4 competitive advantages and one of our, what we believe, is our competitive advantage is our data and insights. And so having Cheddar's being able to plug into the resources that -- and capabilities that we've developed with data and insights, it should be a big advantage for them. It's going to take us some time to be able to get them into our systems, but that's -- and we think about the Darden platform and plugging brands into it, we think that gives -- that enables these brands to have a significant advantage in the marketplace. As far as a strategy to continue to do this, no, let's focus on completing this transaction and integrating this brand really, really well, and then we'll move on and look at it when that time comes. But that's a long time from today.

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Operator [21]

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Next is Sam Beres of Robert W. Baird.

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Samuel John Beres, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [22]

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Gene, I was just hoping maybe in terms of the broader industry, hoping you can maybe share some thoughts on just how you're viewing kind of the underlying demand fundamentals from that industry perspective right now. Just given the large amount of noise we've seen within trends in recent months, whether that's from weather, calendar shifts or maybe timing of tax refunds.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [23]

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Yes, I think all those things that you just mentioned have had -- played a big impact in the quarter. I continue to urge people to take a little bit longer-term approach to this and not get hung up week-to-week, quarter-to-quarter. I would say, if you look at our industry benchmarks for the first couple weeks of March, the tax -- delaying the tax refunds was an impact in February. And we've seen a few -- a little bit better trends in the beginning of March. We're also, in March, dealing with a much later Easter this year than we had last year, so just a lot of noise. When I think about the consumer, I think the consumer has been pretty steady. We know the consumer is looking for everyday value. The consumer is not reacting to promotional value constructs the way they did a few years ago. And I think that when you give the consumer what it is that they want, they're visiting restaurants. And I think if you look at our industry, the brands that are performing and executing at a high level that are well positioned continue to do fairly well.

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Samuel John Beres, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [24]

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Great, that's helpful. And I guess maybe just one follow-up kind of on the implied outlook for Q4 comps up 2% to 3%, does assume a nice pickup from the level you just reported. So I guess, in terms of the puts and takes on that, what gives you the confidence in delivering that acceleration? Is it just that better trend line that you've seen here recently at the start of March?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [25]

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Well, I think it has more to do with the late Easter. Last year, we sit -- we were sitting around this table and talking about why trends slowed down with Easter coming forward. And this year, we'll get the benefits of a later Easter. And later Easter helps restaurants and retail.

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Operator [26]

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Next is Sara Senatore of Sanford Bernstein.

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Stephanie Ng, [27]

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This is actually Stephanie Ng representing Sara Senatore. I had a broader question. I just wanted to understand your perspective on the bar and grill category in relation to the acquisition. This category has been one of the weaker casual dining categories over the last couple of years, more susceptible to deflationary pressures and competition from limited service. Why expand your portfolio to this category? And why now? And also if you could talk about your longer-term view on the bar and grill category, that would be great.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [28]

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Yes. First, we don't consider Cheddar's as your traditional ubiquitous bar and grill concept. We see this as a differentiated varied menu concept with a totally different footprint, much larger buildings, 300-seat restaurants, very -- much more broadly appealing. And we see Cheddar's in a segment that we've defined as the place where brands are winning. And we see Cheddar's competing against Cracker Barrel, Texas Roadhouse and, to some degree, Olive Garden in a segment that has got a very broad audience and is very appealing to lots and lots of people. And so we don't think of this as bar and grill. Sometimes, it gets segmented that way, but we see this as a varied menu restaurant and almost the antithesis of bar and grill. We've got -- we're making all our products from scratch. It's a very broad, appealing menu, so a lot of ribs and steaks and chicken fingers. This is a full-dinner house menu that's competing very, very effectively. And if you look at the value ratings on this compared to bar and grill, they're not even in the same quadrant. And so we think this is the right brand at the right time with a great consumer base to be able to continue to grow this business, and it's significantly underpenetrated.

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Stephanie Ng, [29]

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Okay. And a quick follow-up. How should we think about implications on buybacks for the balance of the year? And if acquisition would likely divert some cash?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [30]

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Yes. On the terms of buyback, what I just would lead you to is our long-term framework, which is $100 million, $200 million a year. And in this fiscal year, we've already bought $200 million. We didn't buy any shares in Q3 because we were in the middle of this acquisition, so we couldn't be in the marketplace. But I would just say, this does not preclude us from staying in the $100 million to $200 million range next year, which is our long-term framework.

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Operator [31]

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Next, we have Will Slabaugh of Stephens.

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Will Slabaugh, Stephens Inc., Research Division - MD [32]

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Just a question on Olive Garden. You further widened that gap as you mentioned between you and peers and didn't show that volatility that we've been seeing in the industry. So I'm curious where you would attribute that success, whether growth at To Go spending stepped up a little bit this quarter or if you think the promotions there seemed to gain more traction on a relative basis. And I'm curious as well if you'd mind commenting on LongHorn, too.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [33]

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Yes. I think there's a couple of things going on. I think -- I'll make a couple of comments that I think are both true for Olive Garden and LongHorn, and it's a boring comment. But we are maniacally focused on improving how we run our restaurants every single day. And our operations teams in both those businesses continue to make significant progress, driven by our goal of simplifying the operation. My overarching message to all our teams this year is that these businesses have gotten way too complex. We need to continue to simplify. And through that simplification, we should execute at a higher level. Now I think both businesses are making some really good decisions and they continue to invest in value. They continue to invest in menu innovation that continues to resonate with the consumer. Olive Garden is still benefiting from a strong To Go presence. That business continues to grow. And we're benefiting from that. In LongHorn, I think we're starting to see the payback from all of the investments that we're making in food as we start to increase the size of our steaks, improve our house salad and some other decisions that we've made along the way to improve the overall operation. And it's going to take time for those to continue to show themselves. But our consumer research right now in LongHorn has never been better. We are moving northeast in our -- in everything that we do there. And I'm really, really excited. So I think the brands are well positioned. They're focused on the right things. They're making good -- the leadership is making good long-term decisions in both of those brands. And they should continue to win because of those decisions.

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Will Slabaugh, Stephens Inc., Research Division - MD [34]

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And as a quick follow-up, would you mind giving the To Go growth at Olive Garden for the quarter?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [35]

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Yes. To Go grew 17%, so we've got 3-year stack of approximately 60% in takeout.

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Operator [36]

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Next, we have Matthew DiFrisco of Guggenheim Securities.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [37]

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I had a couple of questions with respect to trying to better understand the growth potential of Cheddar's in your portfolio. I guess, if -- I've been following it little bit the last couple of years. And as far as the overall system growth, I don't think it was at the 15% pace. So did I hear you right that you think this is a 15% growth brand? Is that something that you've seen in the past? Or is that something that within your portfolio, you think you can get to those levels?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [38]

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Matt, this is Rick. The 15%-ish growth rate was over the last 10 years. So the last few years, they've had a little bit of slowdown in growth. We expect this brand to continue to grow in the category and to grow faster than Olive Garden would grow. So we feel really good about their potential. They're at 140 company-owned restaurants right now with a potential to well exceed that.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [39]

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When it comes into your -- I mean, what is your current growth rate now in your perspective? When you bought this, are you looking at this as a -- you say strong -- obviously, faster than Olive Garden, but that's a wide range? Is this better than a -- better than 5% to 10% growth? Or even faster?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [40]

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What I would say is it's a little early to tell. Let's get -- let us get through acquisition integration. And we know that we're going to have a little bit of a slowdown in growth because of the integration, and that's what they've got into their unit count. And then we'll come back to you later on in this fiscal year to tell you what the growth potential is or the growth rates are.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [41]

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I guess, just to better understand what's going to go through that analysis, can you talk about the portfolio? Is it -- do they grow -- is it a diversified -- does it diversify your portfolio of real estate? Is this a different location where you'd find a Cheddar's in your opinion for the next 140 stores than maybe where a LongHorn or an Olive Garden would go? Or is this going to compete for those same type of sites?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [42]

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Well, it's a 2-acre site, so it's very similar to what Olive Garden needs. It's a much bigger site than a LongHorn, so they probably won't be competing for LongHorn sites. And I think we've got 835 or so Olive Gardens today. There are a lot of places that Cheddar's can go where we're already established from an Olive Garden standpoint. So they -- I don't see any competition for sites. I think what it does from a portfolio standpoint, is allow us to go out and secure the best real estate in a market and then let us decide which one of our brands that we're going to use to take advantage of that site. And that's what's exciting to our real estate team.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [43]

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Okay. And then just a last follow-up question. The outperformance, I just wanted to understand as far as at both LongHorn and Olive Garden, Is any of that explained by the later -- or are you benefiting more and seeing a seasonality because of the later timing of Easter or something else with the calendar? Or is the -- or is that just pure momentum, the widening of the gap versus your peer group?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [44]

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I mean, Matt, I'm going back to -- I think we've been, for 2.5 years, focused on running better restaurants. And I know that it's not sexy and it's not something that people like me to talk about. But that's what we're focused on. It's one guest at a time. And I truly believe that we have -- we need to focus -- continue to focus on that. And we are winning because our retention rates are great. Our people are excited about what we're doing. They're rewarded appropriately. And we're taking care of our guests. When they come in, we're delivering on that promise. And when we don't deliver on that promise, we are recovering with our guests, both socially and in other ways.

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Operator [45]

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Next, we have David Palmer of RBC Capital Markets.

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David Palmer, RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Analyst [46]

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First, just a housekeeping on Cheddar's. The restaurant level margins and overhead as a percent of sales, did you discuss that?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [47]

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Yes. What we said is restaurant level margin is about 17% of sales. We haven't talked about their overhead, but we'll talk more about that in June.

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David Palmer, RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Analyst [48]

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Okay, great. And if you could maybe -- just a strategic question. What was were the institutional learnings do you think from past acquisitions at Darden, like Yard House? And just a broader point about why Darden is ready for a portfolio approach today when that's been difficult for Darden in the past in certain eras and certainly other companies as well. This portfolio approach has proven to be a distraction and -- at some critical point.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [49]

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Well, David, I think we've always been a portfolio company. We've had more brands, less brands, more brands. I think that the way we're organized today, we're fairly decentralized. Each brand has an operating company present, and they have their own team. Unless it's nonconsumer facing, and we can get some significant synergy out of it, it's in the brand. And if it is nonconsumer facing, we bring it in and we try to get as much synergy as we possibly can out of it. And I know I pivot back to what we think we do really well at Darden. And what we do really well at Darden is enable our brands through a couple ways to succeed in the marketplace. We think we give them a great scale advantage. We think the data and insights work that we're doing. We think we help them with the strategic planning. And we've got an umbrella that enables them to have unique operating cultures inside the brands and yet have these industry-leading retention numbers. And so as long as we're organized appropriately and we stay decentralized and have great presidents run their businesses, managing the portfolio is really just a management challenge. And we've got to keep the center small and so that we don't burden the brands, but we help the brands compete more effectively in the marketplace. And I believe every one of our brands goes to market today with a significant advantage. As far as what we've learned on past integrations, I think we've learned a lot. I mean, it's -- from 10 years ago when we did the RARE acquisition with the Eddie V's and Yard House, I think that we'll understand the appropriate speed in which to implement things. We'll be able to prioritize better this time than we did the last time or the time before that. We know where the potholes are. We're going to use an outside consultant agency to do the -- to lead the PMO, so that there's less distraction with our internal resources that -- so we can stay focused on the existing businesses. No one from any other brand will have any involvement in the integration at all, so that every Brand President will be fully engaged running their business and allow us to have a cursory overview of the integration. But I'll be focused on running our businesses day in and day out. So we have learned things. We'll get better and we'll continue to get better. But we're excited about it. And we think we can do this fairly quickly and fairly well.

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Operator [50]

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Next, we have John Glass of Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [51]

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Just going back to the Olive Garden margin performance this quarter, it wasn't clear to me. Are these temporary timing shifts you think that impacted margins? Or is there a step-up in marketing, for example? Or is preopening going to be a greater pressure? So said another way, do you expect these to go away in the fourth quarter in 2018? Or are some of these pressures here to stay?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [52]

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John, this is Rick. The marketing pressure you talked about specifically was timing. Year-to-date, we're flat on marketing as a percent of sales. And we just had a very strong quarter last year, which leveraged those sales in the marketing side. The other things that we've talked about are generally again -- yes, again, it's preopening is one of the big ones. So if you think about what we've had last year, Olive Garden didn't open any restaurants in the back half of the year. And we're opening a lot more restaurants in the back half this year. So for Darden, we are opening more -- we expect to open more restaurants in the fourth quarter this year than we opened all of last year. So in Q3 and Q4, a lot of it was preopening differences.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [53]

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Okay. Then said another way, some of that would stay then, right, if you're going to -- if you seek to open more restaurants next year?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [54]

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Yes. Some of the preopening -- we expect the preopening to increase a little bit going forward. But we don't expect our margins to decline year-over-year as we go forward. But we'll talk more about next year in June.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [55]

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Okay. And then just on Cheddar's and the overlap. You mentioned Olive Garden is a competitor right in that value space. So what do you know about how you currently trade customers, Olive Garden with Cheddar's? And when you look at the physical footprint of the 2 brands, how much of an overlap now? And when you study those stores, how do you see the impact of a Cheddar's opening, for example, on an Olive Garden?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [56]

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Well, we don't see it impacting at all. This is a variety-seeking category. Obviously, we trade guests with Cheddar's, but we trade guests with every competitor. And so we think that they're 2 different occasions. Even though they're both value occasions, we don't see them as a major threat. Whether we owned them or not, they're going to open a restaurant. So they're just like any other competitor, and that's part of how we have to deal with it internally is our brands have to compete against each other effectively.

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Operator [57]

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Next, we have Jeffrey Bernstein of Barclays.

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Jeffrey Andrew Bernstein, Barclays PLC, Research Division - Director and Senior Research Analyst [58]

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Just 2 quick questions on the broader industry. First one, Gene, in terms of the challenges we're seeing for the broader industry, I think you mentioned in your remarks earlier that you don't think the consumer is reacting to the promotional activity as perhaps they have in the past. I'm just wondering how you frame that versus -- or how does that differ maybe from Olive Garden's LTO. I'm just wondering how you bucket those 2 things and whether you're seeing a change in the competitive landscape from those competitors. And then I had one follow-up.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [59]

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Well, I think where I'm trying to go with that is that when you look at everyday value, you look at our Cucina Mia offering and Olive Garden, that has grown from 1.5% preference to 10% preference over the last 2 years. And so we're still out there with some promotional messages. But we're not seeing preference on promotional items increase year-over-year. Now we have some very broadly appealing promotions that we run every single year that our consumer looks forward to. They look forward to Buy One Take One. They look forward to Never Ending Pasta. Never Ending Classics was a big hit. People look forward to that. So we think our promotion -- our promotional cadence is broader than what some other of our competitors are doing, where they're forcing you into buying through a construct to get that value, yet they're check average continues to increase through mix and pricing.

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Jeffrey Andrew Bernstein, Barclays PLC, Research Division - Director and Senior Research Analyst [60]

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Got it. And then just more broadly, when you think about -- well, now that you're adding another brand, but just in general in terms of supply-demand, do you see any change in -- or shift in the dynamic and that's kind of the bigger structural headwind that the category is facing? Whether you're seeing easing headwinds closing of units or maybe shifting a chain versus industry, just how you see the industry from a supply-demand standpoint over the next couple of years.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [61]

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Yes. I mean, there's definitely an -- there's been an oversupply for 10 years in our industry. They're -- and when you look at it, there are share takers and the share givers. And I think the brands that are really focused on their positioning understand what they're trying to deliver to their consumer are taking share. We open a new Yard House today, and we create $8 million in sales. We didn't create $8 million sales in that marketplace. We took that $8 million from other competitors. And so the way I think about it is, do we have share takers or share givers? And all of our brands today are share takers. And so I think the structural headwind is there are a lot of seats out there. But I think that our brands, because of our scale and our advantages, really have a strong advantage in the marketplace. And we're utilizing that. And while [ph] we continue to aggressively manage nonconsumer-facing cost and put less pressure on pricing, I think we'll continue to take market share.

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Operator [62]

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Next, we have Jason West of Crédit Suisse.

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Jason Taylor West, Crédit Suisse AG, Research Division - Senior Analyst [63]

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Just a couple of housekeeping items, I guess, on Cheddar's. What are the investment costs per store there and the actual square footage that you guys are targeting on those boxes?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [64]

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Yes, Jason, this is Rick. The average investment cost is similar to an Olive Garden, so I'll just go with that, not too different than Olive Garden and not too different than an Olive Garden size. Again, we'll get into more detail on everything about Cheddar's in the June call, but that should give you a good idea.

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Jason Taylor West, Crédit Suisse AG, Research Division - Senior Analyst [65]

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Okay. And then in terms of the cash flow going forward, you mentioned that you do still see room for some buybacks here. But you're obviously adding quite a bit of debt to the balance sheet. So is the plan then not going to be to pay down the debt once the deal is funded and your cash is flowing? Or are you going to sort of maintain that level of debt going forward and let the EBITDA kind of catch up?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [66]

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Yes, Jason, when we finish this transaction, whatever debt we take on, we expect to be well within our 2% to 2.5% adjusted debt to adjusted EBITDAR. So we don't think that we have to go down and pay down debt as we continue to grow. But we do expect the EBITDA to continue to help with that. But day 1, we would be right -- smack in the middle of our adjusted debt to adjusted EBITDAR range. That's 2 to 2.5x.

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Operator [67]

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Next, we have Karen Holthouse of Goldman Sachs.

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Karen Holthouse, Goldman Sachs Group Inc., Research Division - VP [68]

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Another quick question on Cheddar's. Outside of the unit growth outlook, what's just the state of the system in terms of remodels? Is it one that you would expect any increased near-term spending on maintenance or remodels?

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Ian Baines, [69]

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This is Ian. One of the great attributes of the brand is that the buildings are built to be timeless. So they never really have to be remodeled. We refurbish to make sure that they're kept in pristine fashion. But because there's no branding, et cetera, as I said, the building is timeless.

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Operator [70]

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Next, we have Howard Penney of Hedgeye Management.

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Howard W. Penney, Hedgeye Risk Management LLC - MD [71]

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I just -- I think just by putting all the pieces of the puzzle together today, is it opening up an Olive Garden gets a better return of capital than a Cheddar's? Is that correct based on what you've said today? And then Gene, can you maybe go into a little more detail on the pivot to buying brands? I know you went through the rationalization, but I was just curious as to sort of why the acquisition strategy again.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [72]

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Yes, Howard, it's Gene. Yes, I mean, obviously, investment in an Olive Garden would yield you a higher return today than at Cheddar's. However, the opportunity to open Olive Gardens is not as plentiful as the opportunity to open Cheddar's. And we've got -- we're not fully penetrated with Olive Garden, but we're getting closer and closer. And it's getting harder and harder to find locations where it would be -- we could get that return because of cannibalization and other factors. As far as the rationale and why we think this was the right time to do an acquisition, I think there's a couple of things. I think we are really confident in the platform that we have built here and our 4 advantage, especially the first 2 around making scale work for us and second, what we're going -- what we're able to do and going to be able to do with data and insights as we get a broader portfolio. And so we think that, that was one of the reasons that we could plug something into our portfolio and give it an advantage in the marketplace. This is a mature industry. And we believe that some consolidation makes sense. And that's what we're trying to do. We think the -- if we get a little bit more scale, we can continue to improve our supply chain. We can improve our use of the data and insights and hope -- and our plan is, plugged into Darden's -- the Darden platforms. Our brands have an advantage in the marketplace, and we can underprice our competitors. And we can continue to take market share.

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Howard W. Penney, Hedgeye Risk Management LLC - MD [73]

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I don't mean to compare it to the previous regime. But I think some of the -- the platform was there before, but it didn't work. And I know this question was sort of asked, but I think it's an important one. The platform has always been there to run multiple brands. So under your tenure, what's changed? Or what is different for it to work this time for maybe it not been as successful as it has been?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [74]

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I think we're much more decentralized today than when we were purchased by Darden 10 years ago. And I think during that time, there were decisions made, right, wrong or indifferent, that they were going to build more capabilities in the center. And they made investments in G&A that they believed they needed to make to grow the business. We are -- we're just doing the exact opposite. We're letting the presidents run their businesses. And we're focused on where we can get synergies in the middle on these nonconsumer-facing areas. And we're trying to manage and drive down costs. I mean, G&A is 4.8 heading -- we're committed to get -- making it further south. And we think we can continue to push that forward. And so I think that's one of the big differences is just how we're operating. The other thing I would add, Howard, is that data is more valuable today. And we think that if we can use this data to understand our consumer better, we're actually focusing on a couple of other things from a data standpoint that's working really well for us from an operational effectiveness. We think it's going to give us a huge advantage and for us to have all that data. And I think the other big difference organizationally is we're just very operational-focused today, and we're focused on a day-to-day execution and cost management. We understand that cost management is going to be extremely important, so that we can continue to put value on the plate for the consumer.

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Howard W. Penney, Hedgeye Risk Management LLC - MD [75]

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Sorry. And just lastly, is there a To Go opportunity with Cheddar's or delivery or takeout?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [76]

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Yes, yes. There's a huge opportunity To Go -- for To Go on Cheddar's. And I think that the management team is just starting to size that opportunity and understand what they have to do operationally to be able to deliver on that. These are extremely busy restaurants with 6,300 guests a week. And then adding the To Go component of it will take a little bit of operational change in their operation. And I know management, in my initial discussions early on, have identified that and they're putting in the -- and developing the processes to implement now.

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Operator [77]

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Next, we have Brian Vaccaro of Raymond James.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [78]

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I just wanted to circle back on the state of the Cheddar's fleet today. And I believe the brand underwent sort of a repositioning that reemphasized scratch kitchens versus a casual café positioning in the past. But just curious, was there a meaningful remodeling program associated with that shift?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [79]

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No. I think that, as Ian just said, these buildings were built in a timeless manner, very well thought out. I think the management, over the years, has done a great job with that. I think the repositioning under Ian's leadership has really been more to highlight and then bring to the forefront all the wonderful things they've done with food over the years. And I think he's brought a fresh approach to it. He went out, did some research, found out what his consumers thought of the brand and what did he need to bring to the forefront to highlight all the attributes that the consumer -- some consumers were given him credit for and some weren't. And I think he's -- I think the team has done a masterful job with this. I love the positioning and it's on trend, scratch cooking.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [80]

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All right, that's helpful. And Gene, you mentioned that Cheddar's has -- or is outperforming from a comp perspective. Was that sort of last 12 months? Was that the last few years? Can you give any historical perspective there on the -- what you were referencing there?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [81]

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No. The only comment on -- and I'm going to stick with my comments. It's been outperforming the industry benchmarks in most recent times. And we'll give you a little bit more color once we own this business.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [82]

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Okay, all right. Fair enough. And then just shifting gears to Olive Garden, if I could. I wanted to ask about average check. I noticed that mix flattened out a bit. Maybe some color on what's driving that. Is that an incremental shift towards value? Maybe some of outperformance at lunch? And then also what's your latest thinking around menu pricing at Olive Garden? I noticed that ticked up a bit late in the quarter. Was that pricing or a change in thinking?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [83]

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No. It was just -- the tick-up in February was driven primarily by some adjustments in To Go pricing. We thought we were a little bit too far under market with that, so we ticked up there and especially in the catering piece. We also took some -- a little bit of pricing on the West Coast in February to offset minimum wage increases. But our philosophy going forward is we're going to try to drive that down a little bit lower than what it has been historically. I don't want to say too much more about it from a competitive standpoint. But we believe, long term -- and if we can continue to underprice the marketplace, we're going to wake up a few years from now and have a real value gap. And the only way we can do that is to take advantage of our scale and find cost efficiencies in the rest of the operation.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [84]

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Okay. And then on the mix dynamics, specifically, was that shift towards value or maybe lunch or something else driving that?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [85]

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No. One of them is if you think about our To Go sales aren't growing nearly as fast as they were before, we're above -- well above 20%, we're down to 17%. Catering is still driving some of that growth, but a little bit less of it because of To Go. And we had some promotional timing shifts. It's not anything other than that.

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Operator [86]

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Next, we have John Ivankoe of JPMorgan.

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John W. Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [87]

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Just a couple of follow-ups, if I may. Gene, you mentioned we've been oversupplied in the category for 10 years. I wanted to get a sense in the trade areas that you care about, whether that effect of supply growth is slowing down or if it's maintaining the same pace as it was before.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [88]

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No. There's definitely less supply growth, especially in the mature trade areas just because there's not a whole lot of areas -- not a lot more room to develop. And so what the dynamic that's going on now is I think the trade areas are getting smaller and people are willing to drive less than they used to. And so I think more of us are thinking about how do we bring restaurants closer to the consumer and how do we develop with that mind-set. But overall, the real mature trade areas today, there's just not a lot of room for development.

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John W. Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [89]

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And one of the ways that some companies are trying to do that is by developing fast casual as opposed to casual dining that, as you say, needs 2 acres in some cases to develop. So what was the thought of going casual dining versus fast casual? And is fast casual ever an option for Darden as you foresee it?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [90]

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No. I mean, I don't see any upside in fast casual. I think it's a very difficult business model. And I think there's a lot of growth out there. I'm not a believer there's a lot of profitability out there. I think the barriers to entry are really low. And I think if -- our goal is how do we put the full back into full service. And by doing that, making sure that we understand the consumer's need to respect their time and that we're able to provide an service experience that is within their time parameters and if we can do that for at the same price, or sometimes even less than fast casual, we're going to continue to win.

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John W. Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [91]

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And I think you've talked before about having 2% to 3% supply growth in the U.S. for your own concepts. Does Cheddar's allow you to be on top of that? Will you be within it? Does Cheddar's growth take over maybe some of the other businesses? I think you may have answered that in a number of different questions but...

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [92]

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I think it's absolutely within the framework. We don't think it gets us over the top of the framework. We think it helps us get in -- get solidly in the framework.

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John W. Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [93]

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Okay. And the last one, in your prepared remarks, you mentioned commodities actually being up in the fourth quarter of '17, if I heard that correctly. Is that kind of the beginning of another cyclical trend in commodities? I mean, what are you currently seeing in the basket?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [94]

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John, it's Rick. Yes, we did say commodities are expected to up, but up ever so slightly in the fourth quarter. Eventually, this is going to turn. So we're not going to talk about '18 yet, but we do see commodity slight inflation next -- this quarter. And we talked about in our presentation, we're about 80% covered. So we're pretty covered for the rest of the year and including 80% in beef. So we're -- we feel pretty good about where our number is for the rest of this year. And we'll talk about '18 in '18.

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Operator [95]

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Next, we have Todd Duvick of Wells Fargo.

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Todd Jeffrey Duvick, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [96]

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Just a couple of quick ones. Could you tell us how many of the Cheddar's restaurants are owned and if there's a potential sale leaseback opportunity for these restaurants?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [97]

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Yes, Todd, this is Rick. All the restaurants are leased, so there really -- there isn't a potential for a sale leaseback.

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Todd Jeffrey Duvick, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [98]

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Okay, that's helpful. And then with the remaining franchised restaurants, can you tell us if the franchisee -- well, if it's one or multiple franchisees and if they have development rights for future restaurant growth?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [99]

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Todd, there's quite a few franchisees, not really any development rights other than maybe a couple of them for future growth.

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Operator [100]

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Next, we have Steve Anderson of Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - SVP and Senior Restaurant and Consumer Analyst [101]

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Just a follow-up on the questions just asked before about the franchised units. Do you foresee any plans to buy back those franchised units given that Cheddar's already had bought back a large franchisee of 44 units? That deal that closed back in January.

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [102]

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Steve, it's Rick. That deal was part of a right of first refusal that Cheddar's had to buy those franchisees back. It's still a little early in the process. Again, we don't want to talk about integration. We're just getting in the throes of that and what we're going to do with the 25 other franchise restaurants. Suffice to say, there have been some conversations that Ian had yesterday, just letting them know that the acquisition is happening. But that's as far as we're going to go.

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Operator [103]

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Next, we have Andrew Strelzik of BMO Capital Markets.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [104]

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I just had 2 quick ones. On the synergies number, you mentioned 4% of revenues versus over 5% historically. Is there anything structural with respect to Cheddar's that kind of limits that synergy opportunity relative to history, maybe the centralization that you talked about? And secondarily, I know over the last 12 to 18 months, there were some Cheddar's unit closures. Just wondering what went into that decision and maybe anything that you learned from a market perspective or a growth perspective, development perspective going forward.

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [105]

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Andrew, the synergies, we're saying 4% of sales. We're just getting in the process of estimating the synergies. We wanted to give you an idea of what we think they could be with -- and with some solid numbers. So we wanted to feel good about the synergies we told you. If we think there is more as we go through the integration process, we'll let you know. But right now, using 4% versus our historical 5%, we think, is a prudent thing to do. In regards to some of the closings, as we said, they did have a pretty good growth spurt over the last 10 years, around 15% growth rate in their company-owned restaurants, including Greer. And they closed about 5 or 6 of them a couple of years ago as that process. And that's normal. That's normal in any restaurant company. You'll have some closings. The good news for us is they already did that, right? So they've gone through the process of looking at their portfolio and they made those closings a couple of years ago, including a couple of them, I think, were franchised unit. So we don't feel that the closings were an issue. We think that was a good thing for us.

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Operator [106]

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Next, we have Chris O'Cull of KeyBanc.

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Christopher Thomas O'Cull, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [107]

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Gene, it looks like Cheddar's will represent just under 10% of the portfolio's EBITDA. How did its size factor into the consideration? And do you expect it to become the third core or primary brand in the Darden portfolio?

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [108]

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Good question, Chris. We wanted to make sure we added something that was going to make a difference for Darden and to help kind of hedge longer term against Olive Garden and ensure we had a big enough opportunity there. We've looked at the opportunity for Cheddar's and we look at the consumer. We look at how it compares to an Olive Garden. We definitely think that Cheddar's long term will be the #3 brand. It could possibly be the #2 brand inside the portfolio. This is a very broadly appealing brand that has a strong, strong reputation in the marketplace. And so we wanted to make sure that we added something to the portfolio that was going to be -- give us a significant opportunity into the future.

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Christopher Thomas O'Cull, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [109]

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Great. And then just ask this question on a different way, but how quickly could you accelerate development of Cheddar's? I mean, do they have managers in training, opening teams? Or do you plan to use the other brands to help fill those spots? Maybe talk a little bit about that.

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Eugene I. Lee, Darden Restaurants, Inc. - CEO, President and Director [110]

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Chris, I think someone asked me earlier what have we learned in the past. We learned that integration is hard. And so we're going to spend the first 12 months -- 12 to 18 months integrating the existing units into our systems, so that we can benefit from our advantages. They've got a strong pipeline. But like any business that we've owned, people will be the restrictor on how fast you can grow. And so what we'll figure out, over time, is there a way for them to leverage resources -- human resources from our other brands to help them grow. But if not, we will grow as fast as we have the human capital to grow. Sites won't be a problem. But we'll just have to -- we'll have to gauge our readiness from a human resource standpoint. We've got to -- the biggest challenge I see growing this brand is to maintain the culture and don't dilute the culture into the future. And to do that, you've got to train people and give them enough time in the brand, so that they can understand what you're trying to do. These are high-volume, fairly difficult restaurants to operate.

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Operator [111]

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Next, we have Jake Bartlett of SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - VP [112]

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Maybe first, just a point of clarification just so we all understand the growth at Cheddar's in the past. What -- how many units that Cheddar's have at the end of 2015? And I asked -- I'm looking at Technomic numbers, which show 168. So just wanted to make sure that's correct or not.

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [113]

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Yes, Jeff -- Jake, I'm sorry. This is Rick. We don't know what Technomic numbers was. I hear you say 168. I don't have the number that they had at the end of '15 in front of me, but we can get back to you on a one-on-one call with that information.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - VP [114]

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Okay. And then also just in terms of your own unit growth, you gave us 30 to 35 on gross units in 2018. Can you help us out with what that means for a net -- on a net basis?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [115]

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Well, in a typical year, we may have some restaurants as leases are coming up. I would just keep -- we gave you the gross number, so you can understand the capital piece. We'll give you -- what I can tell you is in our long-term framework, we've got 2% to 3% total new unit growth, which includes closings. I mean, we think we'll be within that framework without Cheddar's.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - VP [116]

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Okay. Maybe you -- could you help us year-to-date this year, in 2017, how many you've opened and how many you've closed?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [117]

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Yes. We have opened -- year-to-date, we've opened 15 and we've closed 6. And we have, as I said, 24 to 28 openings -- gross openings in the plan this year.

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Operator [118]

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Next, we have Matthew DiFrisco of Guggenheim Securities.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [119]

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Just 2 number questions. The 17% in the Cheddar's margin, how much is marketing in that? Or how does that compare to what you pay -- or what you spend on marketing for your brands? And then also I just -- I don't know if you addressed this or not, I'm sorry if I missed it, regarding franchising. Obviously, this is the first brand that you've got in your portfolio now with franchise growth potential. What type of commitments are out there? And is this something that's going to consolidated longer term? Or is this now a new addition to your portfolio of franchise growth?

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Ricardo Cardenas, Darden Restaurants, Inc. - CFO and SVP [120]

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Matt, marketing as a percent of sales is fairly low. It's less than 1% as a percent of sales. As it relates to the franchise growth, there aren't any commitments really to -- for -- from these franchisees to open any more restaurants. And we will talk a little bit more about what our plans are as we get through the integration.

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Operator [121]

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No more questions at this time, sir.

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Kevin Kalicak, [122]

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All right. Thank you, Rae. That concludes our call. I want to remind you that we plan to release fourth quarter results on Tuesday, June 27, before the market opens with a conference call to follow. Thank you all for participating in today's call.

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Operator [123]

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That concludes today's conference. Thank you for participating. You may now disconnect.