Q4 2006 Darden Restaurants Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to the fourth-quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matthew Stroud. Please go ahead.

MATTHEW STROUD, IR, DARDEN RESTAURANTS: Good morning, everyone. With me today are Clarence Otis, Darden's Chairman and CEO; Drew Madsen, Darden's President and COO; and Linda Dimopoulos, Darden's CFO. We welcome those of you joining us by telephone or the Internet.

During the course of this conference call Darden RestaurantsaETM officers and employees may make forward-looking statements concerning the Company's expectations, goals or objectives. These forward-looking statements could address future economic performance, restaurant openings, various financial parameters or similar matters. By their nature forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in its statements.

These risks and uncertainties include the impact of intense competition; changing economic or business conditions; the price and availability of food, ingredients and utilities, labor and insurance cost, increased advertising and marketing costs, higher than anticipated cost to open or close restaurants; litigation; unfavorable publicity; a lack of suitable locations; government regulations; a failure to achieve growth objectives; weather conditions and other risks and uncertainties discussed in the Company's SEC filings.

Because of these numerous variables you are cautioned against placing undue reliance on any forward-looking statements made by or on behalf of the Company. A copy of our press release announcing our earnings, the Form 8-K used to furnish the release to the Securities and Exchange Commission and any other financial and statistical information about the period covered in the conference call, including any information required by Regulation G, is available under the heading Investor Relations on our website at Darden.com.

We plan to release same restaurant sales results for fiscal June 2007 on Monday, July 10th after the market close. We plan to release same restaurant sales results for fiscal July 2007 during the week beginning July 31st. And we plan to release fiscal 2007 first-quarter earnings and same restaurant sales for fiscal -- August 2007 on Tuesday, September 19th after the market close. We released fourth-quarter and annual earnings yesterday afternoon. Results were available on First Call, PR Newswire and other wire services.

Let's begin by updating you on our fourth-quarter and fiscal year earnings. Fourth-quarter net earnings were $92.3 million and diluted net EPS was $0.60. This represents a 15% increase in diluted net earnings per share. On an annual basis we reported net earnings of $338.2 million and diluted net EPS of $2.16. This represents a 21% increase in diluted net earnings per share.

Red Lobster had an outstanding quarter and year with strong operating profit growth. Olive Garden also had an outstanding quarter and year with strong operating profit growth. Bahama Breeze's financial results this quarter were solid with their continued progress in broadening appeal resulting in a net positive contribution to overall corporate earnings. Smoky Bones remains focused on making the brand more appealing for a broader range of dining occasions.

Linda will now provide detail about our financial results for the fourth-quarter and year; Drew will discuss the operating company's business results and plans, and Linda will return with some comments on our fiscal 2007 financial outlook followed by Clarence with some final remarks. We'll then respond to your questions. Linda?

LINDA DIMOPOULOS, CFO, DARDEN RESTAURANTS: Thanks, Matthew. Darden's total sales increased 8.5% in the fourth quarter to $1.51 billion driven by same restaurant sales growth at Red Lobster and Olive Garden and our operation of 46 more restaurant than in the fourth quarter of the prior year. Red Lobster had a same restaurant sales increase of 9.4% for the quarter and total sales increased 10.7%. Red Lobster estimates that the shift in the timing of lent positively affected same restaurant sales results by 2 to 3% in the fourth quarter.

Olive Garden same restaurant sales were up 2.5% for the quarter, its 47th consecutive quarter of same restaurant sales growth and its total sales increased 6.1%. Bahama Breeze had a same restaurant sales increase of 3.6% for the quarter and total sales also increased 3.6%. Smoky Bones had a same restaurant sales decrease of 7.7% for the quarter while total sales increased 8.7% because of 22 net new restaurants.

In terms of margin analysis in the fourth quarter, food and beverage expenses were 33 basis points better than last year on a percentage of sales basis primarily because of savings on seafood and other commodities. Fourth-quarter restaurant labor expenses were 30 basis points better than last year on a percentage of sales basis with sales leverage at both Olive Garden and Red Lobster offsetting wage inflation and higher indirect labor expenses.

Restaurant expenses in the quarter were 69 basis points higher than last year on a percentage of sales basis primarily because of higher utilities expense and the timing of workers comp and public liability insurance credits taken in last year's fourth quarter. On a fiscal year-over-year basis, workers comp and public liability costs were favorable.

Finally, selling, general and administrative expenses were essentially flat as a percentage of sales for the fourth quarter due to higher media expense related to the launch of Lobster Fest in March. Our tax rate was slightly higher than the fourth quarter of last year due to an increase in the state income tax rate and we continue to have significant share repurchase in the quarter, buying back 2.4 million shares of our common stock.

Turning to the full fiscal year, Darden's total sales increased 8.4% in fiscal 2006 to $5.72 billion driven by blended same restaurant sales growth of 4.6% and a 3.8% increase in new restaurant operating weeks. On an individual operating company basis, Red Lobster had a 4.9% same restaurant sales increase for the year and its average unit volumes were 3.8 million. Olive Garden same restaurant sales increased 5.5% and its average unit volumes reached 4.6 million. Bahama Breeze achieved same restaurant sales growth of 1.7% and average unit volumes were 5.2 million for the year. And Smoky Bones same restaurant sales decreased 3.7% and its average unit volumes were 2.9 million.

In fiscal 2006 Red Lobster opened three net new restaurants; Olive Garden opened 19 net new restaurants; Smoky Bones finished the year with 22 net new restaurants; and we had two openings at Seasons 52 and there was no restaurant development activity at Bahama Breeze this year.

Bahama Breeze delivered solid same restaurant sales growth and was breakeven for the year on an operating profit basis. Bahama Breeze would have achieved moderately positive earnings except for its investment in G&A expense as they position the business for successful renewed growth. As a result of its same restaurant erosion, Smoky Bones' overall operating loss in 2006 was similar to fiscal 2005 when you exclude the asset impairment charges taken in the third quarter of '06.

Darden's strong 21% diluted earnings per share in fiscal 2006 was driven by the double-digit operating profit growth achieved at Red Lobster and Olive Garden and the significant share repurchase undertaking with the resulting cash flows. For the year we repurchased $434 million worth of our shares. With that in the last five years we've repurchased over $1.4 billion worth of our stock, which speaks to the significant cash flows we generate on a consistent basis. And yesterday we announced that the Board authorized the repurchase of an additional 25 million shares, bringing our total open authorization to 29.9 million shares.

I'll now turn it over to Drew to comment on operating companies and be back to comment then on the financial outlook for '07.

DREW MADSEN, PRESIDENT, COO, DARDEN RESTAURANTS: We were certainly very pleased with our fiscal 2006 fourth-quarter results, but, more importantly, as we look at the key operating fundamentals in each of our businesses, their strategic focus and the plans they have in place going forward, we believe Darden is well-positioned to deliver another year of competitively superior performance in fiscal 2007. Let's start with Red Lobster.

Red Lobster had a terrific year, as Linda just mentioned, and has built a strong foundation for future growth. As we've discussed in the past, Red Lobster has significantly improved …