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Brinker International, Inc. (EAT) Q4 2018 Earnings Conference Call Transcript

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EAT earnings call for the period ending June 30, 2018.

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Brinker International, Inc. (NYSE: EAT)
Q4 2018 Brinker International Inc Earnings Call
Aug. 14, 2018, 2 p.m. EDT

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Brinker International Q4 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, vice president of finance and investor relations. Ma'am, the floor is yours.

Mika Ware -- Vice President of Finance and Investor Relations

Thank you, Kate. Again, this is Mika Ware, vice president of finance and investor relations. Welcome to the earnings call for Brinker International's fourth quarter of fiscal year 2018. Results for the quarter were released earlier this morning and are available on our website at brinker.com. Wyman Roberts, chief executive officer and president, and Joe Taylor, chief financial officer, join me this morning here in Dallas.

As is our practice, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. In addition, we will provide guidance for modeling fiscal year 2019 performance. We will then open the call for your questions. Before beginning our comments, please let me remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts.

Any such items should be considered forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more commonly described in this morning's press release and the company's filings with the SEC.

Of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. With that said, I will turn the call over to Wyman.

Wyman Roberts -- Chief Executive Officer and President

Thanks, Mika. Good morning, everyone. As you saw in this morning's press release, Brinker delivered solid fourth-quarter results with earnings of $1.19, positive comp sales at 0.6%, and profit comp traffic at 0.7%. At Chili's, we're three quarters into our new strategy designed to drive sustainable sales and traffic growth, and I'm pleased with the brand's ongoing momentum. Fourth quarter reflected Chili's best performance in more than three years.

As you recall, the strategy is focused on four critical areas of the guest experience: food quality, operational consistency, convenience, specifically around off-premise, and our value proposition. That's the journey we've been on. We remain committed to investing in and improving these four areas, and we continue to deliver sequential improvements to both sales and traffic. Fourth-quarter traffic outperformed the industry by more than 200 basis points, and we're seeing that trend continue.

The fourth-quarter comp sales number reflects a significant investment, nearly 100 basis points, to grow the Chili's loyalty database. Joe will give you more details on the accounting, but during the quarter, we actively incented guests to join My Chili's Rewards program, increasing our already substantial database by more than 25%. This gives us additional marketing leverage throughout the year to drive incremental visits for a sizable portion of our guest base.

We saw a meaningful increase in the percentage of our guests who engage with us through this platform, and we'll continue to expand our direct marketing capability to optimize the efficiency of those channels. At Maggiano's, the brand delivered its third consecutive quarter of positive comp sales at plus 0.3%, and our global partners drove positive results in Latin America, while the Middle East continues to battle macroeconomic challenges.

Our global partners opened seven restaurants during the quarter for a total of 34 new restaurants in fiscal '18, bringing our international presence to 383 restaurants. I'm proud of our performance during what was an important and pivotal year for our business, specifically at Chili's.

We launched Chili's new strategy by simplifying operations to enable consistent execution. We reduced our menu by 40%, which enabled us to deliver hotter food faster and cut our longest ticket times in half. We coupled that with significant quality improvements and innovation around our burgers, ribs, fajitas, and margaritas, and we strengthened our value proposition with our $5 margaritas and a 3-for-10 offering.

Finally, we improved convenience by elevating our technology platform and our execution of takeout, driving sequential improvement in our To Go business throughout the year, ending in double-digit growth in the fourth quarter. The strategy's working. Sales and traffic are both up, guests are telling us through their satisfaction scores that their experience is faster, the food is better, and the value is best-in-class. And our team appreciates us back-to-our-roots strategy and the commitment to simplify their experience.

Engagement scores are at all-time highs, and our employee turnover is significantly better than the industry. Now as we enter fiscal '19, we'll keep working the Chili's strategy. Against a broad consumer base, we see a lot of opportunity to drive frequency with our guests. So we'll keep dialing in our effectiveness in these key areas as we look to grow the business. First, we'll continue to improve how we leverage our industry-leading technology platform. Second, we'll get even more aggressive with our direct marketing capabilities. Third, we'll optimize our value proposition, and finally, we'll continue to target multiple occasions inside and outside the restaurant.

We'll also leverage our capital to continue investing in the guest experience. As we shared before, we're pressing forward with our reimage program. We completed our first market, and we continue to be encouraged by the results. We're also investing in technology that enables speed and convenience, and makes our team's jobs easier. And we're investing in our team to keep the operation simple and to help them focus on the most important person in the restaurant, our guest.

At Maggiano's, we're so pleased to welcome Kelly Baltes as the brand's new president. Kelly is a veteran in our industry, with a proven track record for growing brands while enhancing the guest experience. We've got a great brand and a talented team at Maggiano's with significant potential, and Kelly is the right leader to help the team accelerate the brand's growth. Our global team will continue working to develop successful partners and further expand our presence.

In this fiscal year, our focus is in Asia, especially in China and Vietnam, where we'll open our first restaurants. We expect our partners to open another 30-plus restaurants in fiscal '19, outpacing the category and marking the third consecutive year of more than 30 openings internationally. I'm excited about the ample opportunity we see in fiscal '19 to accelerate momentum and grow the business. As you'll hear from Joe in a moment, our guidance has it returning to positive comp sales and traffic.

In a tough environment, our commitment to leverage our scale and our cash flow to invest in critical aspects of our business will put increasing pressure on our competition and help us capture market share from both chains and independents. Our entire team is passionate about getting better every day, every shift, for every guest, and we're committed to giving them everything they need to do just that. Now, I'll turn the call over to Joe to walk you through the numbers. Joe.

Joe Taylor -- CFO

Thanks, Wyman. And good morning to everyone. Before we move to your questions, let me continue our prepared comments by covering a couple of topics. First, some additional insights related to our recent quarterly performance, then a summary of our sale leaseback financing, and finally some context for our fiscal year '19 guidance detailed in this morning's press release. Our fourth quarter ended fiscal year '18 in a positive fashion, with the company reporting both top-line and EPS [earnings per share] growth, most importantly driven by Chili's return to positive comp sales from continuing traffic improvements.

This improvement in comp sales to positive 0.6% for the quarter underlined an increase in quarterly company sales to $791 million. For the quarter, our adjusted earnings per share excluding special items increased by 9.2% to $1.19. For the fiscal year, we've reported adjusted earnings per share at the high end of our guidance range of $3.50, a 9.4% increase over the prior year.

As it relates to Chili's quarterly comp sales performance, let me note a couple of items. Importantly, traffic continued its steady improvement and is now in positive year-over-year territory, reporting close to a 1% gain for the quarter. As we had noted earlier in the year, we intended to be less dependent on price to drive comp sales improvement and more focused on incremental traffic. This approach to driving improved top-line performance will continue this fiscal year.

You likely noticed our comp sales for the quarter included a negative price impact of 1%. This reflects the year-over-year comp expense increase for our promotional direct marketing and loyalty efforts which are accounted for as a reduction in price. Reiterating Wyman's earlier comment, reactivation of our loyalty program, following the transition from plenty, heightened the level of this marketing activity in the quarter. We believe reduce net comp sales for the quarter by approximately 1%.

Our restaurant operating margin as a percent the company's sales decreased in the quarter to 15.9%. While investing in areas impacting cost of sales, such as food and value propositions contributed to this reduction. The primary driver, the margin decrease, was higher restaurant bonus compensation and ongoing headwinds from hourly labor, much of which are related to increase guest traffic. Our cash flow for the fiscal year remained strong with EBITDA, $412 million and free cash flow of a little more than $183 million which was utilized to fund dividend and share repurchases.

We also utilized our borrowing capacity during the quarter to increase the number of shares repurchased, buying over $3.1 million shares in total during the quarter. This brought our shares repurchases for the year to almost $7.9 million shares or approximately 16% of the shares outstanding at the beginning of the year. This repurchase activity did result in our lease adjusted leverage, increasing into 4.16 times EBITDAR at year end.

However, the successful completion of our recently announced sale leaseback transactions allowed us to use the proceeds to repay a meaningful portion of our revolving credit borrowings. We expect our adjusted leverage this year to be in the 3.7 to four times range. Speaking of our sale leaseback financing, let me provide a quick summary. Over the course of the last several weeks, we entered into three separate purchase agreements to the sale of 143 restaurant properties to be leased back to us for 15-year terms with extension options.

We have subsequently closed on all but a small number of the properties and anticipate wrapping up the additional few closings in the near future. The combined transactions have generated approximately $443 million of gross proceeds. We are pleased with the structure of the transactions, the ability to close the offerings in a timely manner, and believe we unlock significant value from this real estate holdings.

The transaction will impact several expense items going forward, mainly increase the rent expense partially offset by lower depreciation expense both of which are incorporated into our guidance for the current fiscal year. Now, with respect to guidance. Underlying our fiscal year 2019 guidance is the continuation of the strategy to drive traffic at our brands, to invest in improving the guest-guest experience, the look and feel of our restaurants, and the value we offer our guests.

We're looking to improve our bottom line earnings through a better balance of organic growth and our capital allocation programs. Our full guidance along with our guidance policy can be found in this morning's press release in the investor relations area of our website brinker.com. Here are several highlights: For the fiscal year we are currently forecasting comp sale's growth of positive 0.75% to 1.75% and revenue growth of 1% to 2.25%.

I would note that included in our revenue growth for this fiscal year, our franchisee marketing contributions through the adoption of the new revenue recognition rules. Without the inclusion of these marketing contributions, our range of the revenue growth, not comp growth, revenue growth would be approximately 50 basis points lower. We do expect a step down in our restaurant operating margin for the fiscal year.

Primarily driven by the SLB rent and the previously mentioned change in franchise marketing contribution recognition, which was previously recognized as a credit to marketing expenses in the restaurant expense line. For the year, we are expecting restaurant operating margins to be down 1.6% to 1.8%. Without the sale-leaseback financing impact and change in revenue recognition standards, our restaurant operating margin for the year would have been forecasted to be flat to slightly positive.

We are increasing our capital investment into our existing restaurant fleet and expect capital expenditures for the year of $140 million to $150 million. As Wyman mentioned earlier, we're now fully into our restaurant reimage program which is the driver of increased capex spend for the year. The average reimage spend per restaurant is estimated between $210,000 and $230,000 and we are scheduled to complete approximately 250 restaurants by the end of this fiscal year. The overall project will take most of the next three fiscal years.

Free cash flow is estimated between $165 million and $175 million leading to a forecasted weighted average shares outstanding for the year between $38 million and $40 million shares. Finally our adjusted earnings per share guidance for fiscal year 19 is a range of $3.70 to $3.90. With my comments now complete let's open the call for your questions. Kate, I will turn it back to you to facilitate.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your touch-tone phone now. We do ask while posing your question to please pick up your handset if listening on speaker phone to provide optimum sound quality. Please hold for just a moment while we pull up the questions. And our first question today is coming from Nicole Miller. Please announce your affiliation then pose your question.

Nicole Miller -- Piper Jaffray -- Analyst

Thank you. Two quick questions. I just want to understand if you had it yet, on the remodels, the difference in guest satisfaction scores between your core base. Because I believe you had a remodel market done, I think last month. What can you tease out and tell us that customers are saying now?

Wyman Roberts -- Chief Executive Officer and President

Oh hey Nicole, I'm Wyman. The feedback from the guests has been positive. Obviously, they really appreciate, and we see the biggest movement as you would expect, in the atmosphere scores, on the relevance, the cleanliness, and that's the piece of the project that gets the most playback. But we're also excited about the opportunity to give guests a better guest experience when they come into the restaurants. And we're working very hard with all the operators to make sure when we make the investment in the market, that the other aspects of the experience are also stepped up.

So, right now the feedback and, more importantly, what they're doing with their visitation and their frequency is very encouraging. Well what we said, we just finished our first market that had been previously reimaged seven years ago. And we're encouraged by how that market is playing out as well as what we've seen in the market I think you're referencing, which is up in the Northeast, that we had done but had never had the prior reimage.

Nicole Miller -- Piper Jaffray -- Analyst

And I just want to say hi to Kelly and I want to understand a little bit more about Maggiano's. Can you talk about why you're accelerating development now? Is this going to be the same box, or a different-level economic model? Maybe a little bit about what the total adjustable future of the brand is. And again, just why now for the acceleration? Thank you so much.

Wyman Roberts -- Chief Executive Officer and President

Well, I think first, we're excited to have Kelly on board, and to answer your questions really, we want to give Kelly that opportunity. So, there isn't a specific prototype or development plan that we want to share with you right now. Kelly just got his feet on the ground. He's getting to know the team and the brand, and very quickly we'll work toward putting his plan together for how to grow and develop Maggiano's, first to strengthen it in the footprint that it has and then ideas for other potential growth. So, that's where we're going. Thanks.

Nicole Miller -- Piper Jaffray -- Analyst

Thank you.

Operator

Thank you. Our next question today is coming from John Glass. Please announce your affiliation then pose your question.

John Glass -- Morgan Stanley -- Analyst

Thank you. It's Morgan Stanley. First, just on the comments on the pricing being negative and as it relates to building up back your direct marketing program, is that something that continues? Do you forecast that throughout 2019, or was that really just an upstart cost, if you will, and it doesn't persist?

Joe Taylor -- CFO

John, the answer to the question is really both. Again, embedded in our guidance to you particularly as it relates to the comp sales is an expectation of the marketing spend, which it really is just is a reduction to price. But as I mentioned, we really had heightened the activity as we reinvigorated that program in the fourth quarter, so the incremental drag coming from that is kind of that 1%-ish range that we mentioned to you.

John Glass -- Morgan Stanley -- Analyst

But just to be clear, does it stay at that level, or is this sort of the peak and it sort of it tails off as the spending tails off, if you will?

Joe Taylor -- CFO

I think we all parse it in and out, and again it's a marketing tool we have to use. But I think the level was higher than you would normally expect to see it on an ongoing basis in the fourth quarter.

John Glass -- Morgan Stanley -- Analyst

And then just on your restaurant margin guidance so, can you maybe just talk about why flat to up a little bit is feasible? Is that driven by the positive comps? Is there another element of it particularly as you highlighted labor still a headwind? And presumably if you're planning on positive traffic, that would continue to be the case. And can you also just quantify specifically what the cost of the incremental lease expenses for 2019?

Joe Taylor -- CFO

Yes, a couple of things there. First on the flat to slightly positive without the adjustments, much of that would be emanating from the top line growth and some of the leverage you get out of that environment. Also, we continue to look at opportunities for efficiencies at other places within the restaurant operating segment. We do look at a fairly benign still cost of sales environment, maybe a touch slight inflationary if you look across the broader basket there, but top line is the contributor in the biggest way.

As far as the impact as it relates to the two items I gave you, which were the SOB rent expense and the shift in the revenue recognition for franchisee marketing contributions. On a combined basis, that's between $50 million and $55 million impact to that restaurant operating margin, and actually roughly split relatively close between the two of them a little bit more on the rent expense. And then you had a depreciation question?

John Glass -- Morgan Stanley -- Analyst

No, but you answer if you want.

Joe Taylor -- CFO

Yes. Actually, the offset to that, too, you remember, too, is we do have a decrease in depreciation related to the sale of those assets. And that offsets just under a quarter of the rent expense.

John Glass -- Morgan Stanley -- Analyst

Okay, thank you very much.

Operator

Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation, then pose your question.

Jeffrey Bernstein -- Barclays Capital -- Analyst

Thank you very much, calling from Barclays. Couple questions. One, maybe as you think about the guidance for fiscal '19 noncomps, which was quite specific at 0.75% to 1.75%. I'm just wondering if you can give some insight into how you arrived at that. I think you mentioned that assumes positive traffic, but in terms of the components that it adds up to that, and maybe how you think about that relative to the casual dining industry for fiscal '19. And then I have a follow-up.

Wyman Roberts -- Chief Executive Officer and President

Hi Jeff, I'm Wyman. Yes. Obviously, we build our plans from the base, and we make an assumption about the industry. We don't see it changing dramatically from where it's at, given everything we know today. So, kind of in that probably low 1% positive comp sales to 2[%]. So, we see ourselves gaining share specifically on traffic, like we have been doing in the last few quarters, and we continue to see that throughout '19. Then, from a from a sales perspective, taking share but significantly driving share gains from traffic.

Jeffrey Bernstein -- Barclays Capital -- Analyst

Got it. Then you mentioned the off-premise, I think you said the fourth quarter had double-digit growth. I was wondering if you can maybe provide some update since you and all your peers are aggressively pursuing it. Maybe what percentage of your mix it is the To Go, how much of that maybe is delivery, average check, the margin, any kind of components around that To Go and delivery opportunity, and where you are today.

Joe Taylor -- CFO

Yes, Jeff from a To Go standpoint, we're continuing to see our mix of To Go between 11.5% and 12%. Interestingly enough, one thing I would point out is the mix isn't moving as much because we are growing the whole pie. We see year-over-year mid-teens to upper teens growth on a very consistent basis in our To Go business, but we're growing both To Go and in-dining room operations, which gives a little less impact to the overall mix. We're real pleased with the direction there.

Delivery continues to be a very small component of that, but we are going to be leaning more aggressively into delivery as we've move throughout the fiscal year, and I would anticipate it having some impact on our ability to move the business forward, particularly in the second half of the fiscal year.

Jeffrey Bernstein -- Barclays Capital -- Analyst

Got it. Just, let's say, factual clarification maybe on the leverage side of things. The long-term debt after the pay down, I know you gave us, I think what you thought your leverage level would be, but how much absolute long-term debt are you thinking and maybe, what's the interest expense that you're expecting within guidance for fiscal 19?

Joe Taylor -- CFO

Again, I gave you the quarter ending is that three seven to four times is what we would expect to see as you move throughout the year. We also will be investing in the business to things like our reimage program. So, that will probably have a little bit of a debt as we move throughout the fiscal year, but we're comfortable at that. From an interest perspective, we're anticipating an increase in interest is going to be probably up in the $3.5 million to $4 million range depending on interest rate increases and things of that nature. But we're comfortable in our ability to manage at that level.

Jeffrey Bernstein -- Barclays Capital -- Analyst

$3.5 million to $4 million above your fiscal '18 actual?

Joe Taylor -- CFO

Correct. We should be in that $4 million range above.

Jeffrey Bernstein -- Barclays Capital -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question today is coming from David Palmer. Please announce your affiliation then pose your question.

David Palmer -- RBC Capital Markets -- Analyst

Thanks. RBC. Just a question about what you found, what works marketing wise and how will that shape your marketing into fiscal 19 and more specifically about that three for $10. You introduced it, you polled it, only to return it lately. Was that a restaurant margin sacrifice in the quarter? And is that something that you're going to stick with in fiscal 19 and find some other ways to offset, to keep that underlying restaurant margin performance flat, this fiscal year? Thanks.

Wyman Roberts -- Chief Executive Officer and President

Hi everyone. I think a couple of things. One, we're going to be a little less specific on specific marketing tactics and their effectiveness and our thinking about them just from a competitive perspective. What I'll say is, in general, with regard to our marketing mix and our promotional strategy, the importance of non traditional mediums is rising. So, digital, social, direct including our CRM and loyalty are areas that we can measure, feel that we have a competitive advantage on and our thing that the marketing team here is doing a really great job, leaning more into and so from a tactical perspective, those are some of the areas that the marketing team is again getting more focused on and how our changing the mix a little bit.

With regard to the specific offers and how we're going to dial in our value proposition, we're going to keep that a little closer to the vest, three for $10 has been a strong offering out there for us. We're excited about what it does for the business in both day parts and how hard it works for us and it's within our margin structure to make it work and you've seen that in the forecast we've laid out there for you.

Joe Taylor -- CFO

David, I would add to that, specific to the restaurant operating margin, when you look at some of those opportunities, when you mentioned one. We understand some of them will have an impact, particularly if you think about cost of sales to the extent that they're impacting the mix dynamics. But obviously we're looking at the overall comp opportunity and the traffic driving opportunities to come out of that activity. So, that's typically where we would look at impact on costs but positive benefit and offsets driving top line.

David Palmer -- RBC Capital Markets -- Analyst

Thank you.

Wyman Roberts -- Chief Executive Officer and President

Thanks David.

Operator

Thank you. Our next question today is coming from Sara Senatore. Please announce your affiliation then pose your question.

Sara Senatore -- Sanford Bernstein -- Analyst

Sanford Bernstein. Thank you. And I have just maybe two follow up questions, one is on the impact that the yield [inaudible] .

Joe Taylor -- CFO

Sara, we're having some trouble, we messed [inaudible] .

Mika Ware -- Vice President of Finance and Investor Relations

Yes, You're breaking up.

Sara Senatore -- Sanford Bernstein -- Analyst

Can you hear me now?

Joe Taylor -- CFO

That's better.

Sara Senatore -- Sanford Bernstein -- Analyst

Okay. I'm sorry. I'm on a cellphone commercial. I was just asking about the comp's trajectory in the last quarter and just the fact that if I back out the 1% negative price and you're in-line with the low single digits that you have been guiding to on the last conference call, were this more investment than you had expected? Or you just at the point looking at the organic underlying? I'm trying to understand how you thinking about the returns on this pricing, so any color you can give on the loyalty members and the return you would expect to see and then I'll have another question please.

Wyman Roberts -- Chief Executive Officer and President

Yes. I think it was a decision we made to be more aggressive in the quarter than we had maybe originally planned. We're excited about the opportunity with the restart of the my Chili [inaudible] , the sunsetting of the Plenti Program to get our loyalty and our CRM program back in 100% control and to grow it. So, that's what we did, it's an investment and a marketing strategy. If you think about it, they're paid out over a longer period of time. So, that investment will leverage those names and those relationships for months if not years.

So, that's what that investment in the quarter did for us, it was one we wanted to make quickly with the reestablishment of My Chili's Rewards. Again, as we've mentioned before, probably a little more aggressive than we'll do in the future, but it's a strategy and a tactic that we will continue to lean into and we think we bring a competitive advantage to the category with our team and our insight.

Joe Taylor -- CFO

I said as it relates to the return piece of the equation from a marketing channel perspective, we do feel that direct marketing piece particularly as we learn how to enhance it and perfect, it has some of the higher returning attributes compared to other marketing channels. So, it's going to be well worth the investment and one that you can drive over an extended period of time.

Sara Senatore -- Sanford Bernstein -- Analyst

Okay. Great. Thank you. That's helpful and then just on the sale leaseback, it gets my rough math that's the cap rates were probably higher than what you pay on refunded debt. I wonder first of all if I'm thinking about that right about then what was the underlying rationale for doing this, the leaseback if the rates are, you know, if you could arguably get a better rate in terms of funded debt. Thanks.

Joe Taylor -- CFO

Well, one Sarah, we're very pleased with the structure of the transaction, the cap rates that came in below our targets when we looked at the transaction and we found our offerings to be very compelling in the market. So, we're pleased with that, I mean it is a long-term financing, so relative to the long-term financing markets, so I think it's very compelling. It's also the ability to unlock the amount of value that we did, the impact on our leverage when you do the adjusted six times, it's significantly below the amount of value we unlocked in that transaction. So, I think the rates we paid are right in line and pleased with the transaction.

Sara Senatore -- Sanford Bernstein -- Analyst

Thank you.

Operator

Thank you. Our next question today is coming from Gregory Francfort. Please announce your affiliation then pose your question.

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

Hey guys, I have two questions. The first is just on margin, can you maybe help me understand the bridge from 18 to 19. I'm getting like 50 to 70 basis points on the road break and then like another 100 basis points on the incremental rent. So, I guess I'm just trying to get a sense is that right? Then the other question I had was on the leverage use of proceeds. You guys bought back a lot of stock with the revolver ahead of this deal, why not just de-lever the company from here? What was the reason to keep leverage of 3.7 to four times?

Joe Taylor -- CFO

Greg, I think as you look at and then I'm assuming you're talking about restaurant operating margin bridge is what you're referring to, you're right in the context of the bigger impacts are those higher rent and franchise. Marketing them, there's obviously a number of different things that come into play, the manager bonus, reaccrual as we reaccrue back to target comes into play, you have offsets impacting. The biggest offset being what we think and we're going to do from a top line, flow-through, so there's a number of other puts and takes throughout that restaurant operating margin, but topline benefits offset by the areas I just talked about are the really largest pieces of the equation. Again, down 16 to 18 is the guide.

Without those changes that would get you back to flat, to slightly positive. So, I think, you can get a relative feel for those puts-and-takes. You're thinking about it the right way. As it relates to the leverage position, we're very comfortable at that leverage position that I guided you to. The cash flow dynamics of the company remained strong and more than capable of managing that level of leverage. If for some reason from some unforeseen issue or market dynamics, we wanted to de-lever, we have the ability to do that in a fairly consistent manner.

We also have cash flows that are improving from ongoing operations improvement and from the tax reform adjustments. So, a number of dynamics that continue to keep us very comfortable at that leverage level.

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

Thank you for the color. Maybe just one follow-up, is there a margin benefit from losing the point the payments and is that expected at all in in next year's numbers?

Joe Taylor -- CFO

The change on loyalty definitely is incorporated into the numbers for next year. There is a shift in marketing expanse. If you want to think about it from restaurant expense where plenty was accounted for into the offset to price that we talked about earlier.

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

So just basically a margin to sales effort.

Joe Taylor -- CFO

Correct.

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

Okay thank you.

Operator

Thank you. Our next question today is coming from Chris O'Cull. Please announce your affiliation then pose your question.

Chris O'Cull -- Stifel -- Analyst

Thanks. It's Stifel. Show that the comp growth you're targeting for fiscal 19 would seem to equate to maybe 40 basis points of leverage but the impact of the promotional activities impact on cost of sales, the labor cost pressures you guys have seen has been greater than that. So I'm just wondering if you can maybe give us a little bit more color as to how you maintain flat to [inaudible] positive margin excluding the sale leaseback and accounting changes.

Joe Taylor -- CFO

Again I think the biggest opportunity is that top line growth when I look at the different puts and takes. It's a significant opportunity to leverage the fixed expenses that are throughout that piece of the margin. There is a little bit of benefit. It's a relatively smaller one compared to the other ones I talked about in that shift where marketing expenses coming out from and into sales. We're going to be efficient as we we've talked about and how we look at the other pieces equation like Procter sales and how we run the restaurants. So again, we think efficiency combined with the ability to lever those fixed costs as we move throughout the year is going to be an effective piece of that equation.

Chris O'Cull -- Stifel -- Analyst

What kind of margin impact do you expect from a [inaudible] leverage impact? Do you expect from the 1% increase in comp? Is it greater than 40% flow-through?

Joe Taylor -- CFO

It has the potential being right in that range really, Chris, when you think about it. There's obviously a lot of puts and takes, they come into play there but.

Wyman Roberts -- Chief Executive Officer and President

There is some price in there as well? [inaudible] .

Obviously that'll flow through at a better than your typical. So when you factor in that into the mix, you're able to get that net neutrality position that we're looking for.

Chris O'Cull -- Stifel -- Analyst

Can you help us understand, Wyman, what is the effective price increase excluding all the accounting machinations from the consumers perspective, what kind of pricing are you expecting?

Wyman Roberts -- Chief Executive Officer and President

Yes and we talked about this I think fairly extensively last call. We got a little aggressive in 17 and 18 we back ourselves back into where we want to be, which isn't that 1% to 2%. Really that one and a half is the sweet spot for us. We feel like based on everything we've seen that that gives consumers enough leeway that absorbed the price without having to make significant changes in their visitations.

Chris O'Cull -- Stifel -- Analyst

I apologize if I misheard you, but did you say the interest expense would be up year-over-year in fiscal 19? Because I thought the company used the proceeds from the sale leaseback to repay debt.

Joe Taylor -- CFO

We did use the proceeds from the sale-leaseback to repay debt. Obviously, we are anticipating floating rate increases if you think through the rate curve, so we embed that thinking into our forecast. Obviously, we'll continue to make investments into the business, such as the reimage that could have some ramifications on the debt levels as we move forward. But I think that interest cost is very consistent with the 37 to 4L I gave you.

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

Okay, and then just one last. Are you including the amortization of gain from the sale leaseback transaction as a net in your rent expense?

Joe Taylor -- CFO

From a GAAP perspective, it will be amortized over the life of those deals. But we intend to dial that out, so that it will not have an impact to adjusted earnings on a go-forward basis.

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question today is coming from Robert Derrington. Please mention your affiliation and pose your question.

Robert Derrington -- Telsey Advisory Group -- Analyst

Yes, thank you. Telsey Advisory. Wyman, I'm curious, I think most of us know that the Supreme Court recently changed the rules of the land as it relates to gaming. I'm just curious from your view. You all have been typically pretty protective of the family environment within Chili's but you're also spending $250,000 to update and renovate your bars, which quite frankly may offer you an opportunity. Have you given any consideration to that? Ultimately trying to figure out is there some way that Chili's could participate within that?

Wyman Roberts -- Chief Executive Officer and President

Bob, not in a major way, not in a way that would reposition the Chili's brand. We're a family oriented and a varied menu bar and grill mix. There's not a positioning that would allow us to heavily lean into some gaming options. Obviously, there's others that are looking at that now. There are opportunities, and we will continue to explore on a smaller basis opportunities within the building that may allow us to take advantage of it or our franchisees to take advantage of some state and local opportunities that don't reposition the brand and in a way that significant, but offer maybe some alternative revenue sources for them, so we're exploring some of those. But nothing from a major brand positioning perspective that would embrace gaming at Chili's.

Robert Derrington -- Telsey Advisory Group -- Analyst

Okay. Then as a follow-up, on your delivery program and your To Go. Certainly, there's big opportunity there, and I think the technology, the improvement in your app you've probably got one of the easiest to use apps within the industry. Ultimately, do you foresee the ability to place a delivery order through your app? Or how do you see ultimately Chili's taking advantage of delivery whether it's third party or through your own means?

Wyman Roberts -- Chief Executive Officer and President

Yes. Well, I think, again, this is where we can bring our technology and our scale to bear. I think the idea that we can take the consumer benefit that we see in our app which is significant. We're seeing amazing growth in the use and adoption of the app. Team's done a great job building that app and making the Chili's takeout experience about it, seamless and convenient as it can be. We'd like to use as much of that the infrastructure with partners in a delivery idea primarily, so we keep it simple for the operators.

Wyman Roberts, Chief Executive Officer and President

When you walk into some restaurants and you see multiple tablets from multiple delivery people, you just have to really wonder about how easy it is and how consistent the operators are able to manage that information flow. We are talking with partners and with the suppliers to see how we can integrate delivery into the same technology platform, so that we keep it simple for the operator, so that we make sure that everything we do support their ability to deliver a consistent guest experience whether it's in the restaurant, picked up or delivered.

Robert Derrington -- Telsey Advisory Group -- Analyst

Terrific. Thanks for that update.

Wyman Roberts -- Chief Executive Officer and President

You're welcome.

Operator

Thank you. Our next question today is coming from Stephen Anderson. Please announce your affiliation and pose your question.

Stephen Anderson -- Maxim Group -- Analyst

Yes, thank you. I'm from Maxim Group. A couple of questions. First, within your guidance of 0.75 to 1.25, can you look at something that's elevated your quarterly cadence? Keeping in mind that the first half of the fiscal year you're lapping the effects of Hurricanes Harvey and Irma and I have a follow-up.

Wyman Roberts -- Chief Executive Officer and President

Yes, Steve obviously those events are coming up here fairly quickly and we'll lap on those when we anticipate getting some boost from that [inaudible] . From our lips let's hope that the hurricane season stays fairly benign. We're three quarters into the strategy of Chili's and obviously we've seen sequential growth throughout 18 and we would expect that to continue and maybe be a little tougher lap as we get to the back end of 19. But we see consistent growth through the year.

Stephen Anderson -- Maxim Group -- Analyst

Okay. And my other follow-up question is I know it's like on your dividend, the first time I've seen in quite some time that you haven't increased the quarterly dividend. Usually it's done at the beginning of the fiscal year. Are you signaling in some way some shift in how you view your use of cash or is it you are still committed to use dividend?

Joe Taylor -- CFO

Well obviously the Board approved a dividend payout as part of this quarterly announcements so that commitment continues. We're comfortable with the dividend payout from both the payout ratio and the yield that it has been generating. So I think the dividend speaks for itself from that commitment level. I don't think it does the signaling of anything of any significance in that regard, Steve.

Stephen Anderson -- Maxim Group -- Analyst

All right, thank you.

Operator

Thank you. Our next question today is coming from Karen Holthouse. Please announce your affiliation and then pose your question.

Karen Holthouse -- Goldman Sachs -- Analyst

Hi I [inaudible] with Goldman Sachs. One quick one, did I miss in prepared remarks, did you give what commodity inflation was in the quarter?

Joe Taylor -- CFO

We didn't say it Karen in the prepared remarks but for the Fourth Quarter [inaudible] is that you're asked.

Karen Holthouse -- Goldman Sachs -- Analyst

Yes.

Joe Taylor -- CFO

We haven't disclosed that. There isn't a major delta as it relates. It's a fairly benign, flattish market, a year-over-year. And frankly, going forward I think I mentioned we anticipate that environment is going to stay there maybe slightly inflationary as you look over the broad reach of the supply chain.

Karen Holthouse -- Goldman Sachs -- Analyst

Okay. And then one other quick modeling one. On four margins you mentioned the manager bulk so you're [inaudible] the headwind next year. How should we think about that cadence of that through the year particularly given the improving health trajectory through the year?

Joe Taylor -- CFO

It will impact throughout the year particularly on the manager bonus side of the equation. The end of the performance of this last year had higher manager bonuses as I mentioned in the Fourth Quarter so the impact of that cadence is probably greater in the front half and a little bit if we move into the third quarter. I can tell you that from a dollar perspective if you look across the scope of all of our incentive compensation programs both within the restaurant and the RSC. The real accruals as it relates to all of those programs is right about $18 million year-over-year.

Karen Holthouse -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question today is coming from Andrew Strelzik. Please announce your affiliation, and pose your question.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hi. BMO. Thank you. My question's about the same-store sales guidance. So, over the last 12 months or so, casual dining industry has been a bit stronger than it had been prior to that, and you've talked about your rates and our performance over the last couple quarters. As you're looking for an acceleration now in 2019, are you anticipating that the industry stays at those better levels, or do you think that you can accelerate the con trajectory, even if the industry were to return to where we've been?

Wyman Roberts -- Chief Executive Officer and President

Yes, Andrew. We see it staying in that same range, and again it's accelerated, it's plus or minus a point, it's not been tremendously dramatic although sometimes response is. But we see it being in that same range.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Okay. My other question was on the capex trajectory. You've said previously with respect to the remodels that you wouldn't return to the prior peaks of capex. So, is this a high point from capex when we see it holds here for the next couple of quarters as that program goes forward, or does it ramp? I'm just wondering about the trajectory over the next couple of years from a capex perspective.

Joe Taylor -- CFO

Yes, Andrew. The reimage program obviously is driving the delta of that, and it is designed to be pretty consistent over those three years. So, the pacing is going to be relatively similar year-over-year.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Great. Thank you very much.

Operator

Thank you. Our next question today is coming from Brian Vaccaro. Please announce your affiliation, and pose your question.

Brian Vaccaro -- Raymond James -- Analyst

Raymond James. Thank you. Just back to the menu pricing, if you exclude the 100 bips impact of the loyalty impact it caught out of a quarter, it looks like pricing was flat. Is that the right way to be thinking about pricing currently in the menu. You spoke to a target getting back into sort of the big ones, when do you expect to get back to that level?

Joe Taylor -- CFO

Brian let me answer first phase and then Wyman can talk it to the seconds of it. Menu pricing in the Fourth Quarter was about 90 basis points. So, it was there but significantly lower than we had seen in previous quarters as we again tried to maintain that price discipline.

Wyman Roberts -- Chief Executive Officer and President

We should be close to that going forward. We're targeting that one and a half range and I think, give or take, some fluctuations and just timing of menu rollouts we should be there pretty much first quarter on.

Brian Vaccaro -- Raymond James -- Analyst

Okay. Sorry if I missed it, but what was wage inflation in the fiscal Fourth Quarter, and then what's your expectation around wage inflation in fiscal 19?

Joe Taylor -- CFO

Brian, no you didn't miss it. But I will tell you is about 3% in the quarter. We expect wage price inflation to be in that three to three and a half percent range as we move through this year.

Brian Vaccaro -- Raymond James -- Analyst

Okay, great. Then just one last one, back to delivery at Chili's, can you remind us how many of the system units are currently covered by delivery, and how many might be covered by the end of fiscal 19.

Wyman Roberts -- Chief Executive Officer and President

We don't have that level of detail for you, Brian. I'll just say, we're actively testing in many restaurants with most of the major players. Then we support a lot of the major and minor players in restaurants as well, but we're actively learning from tests with the big players to understand.

First guest issues and acceptance, and then business impacts. We anticipate having a much better understanding for, OK, what is this? What does delivery really mean especially for Chili's and we're talking about Chili's again. The Maggiano's delivery store is much more developed, bigger part of the business. We just need to get that level of understanding both from a guest and a business perspective, and we're working very aggressively to understand that in the next quarter or two.

Brian Vaccaro -- Raymond James -- Analyst

Okay, thank you.

Wyman Roberts -- Chief Executive Officer and President

Thanks, Brian.

Operator

Thank you, our next question is coming from John Ivankoe. Please announce your affiliation then pose your question.

John Ivankoe -- JP Morgan -- Analyst

Hi, thank you. With JP Morgan. I wanted to try to piece together I think if you and different things that were said on the call hopefully. I have the context right here. Wyman, your prepared remarks, I think I've heard you say that. Trends we're continuing into the current quarter. By that, you meant traffic outperformance relative to peers?

Wyman Roberts -- Chief Executive Officer and President

Right.

Brian Vaccaro -- Raymond James -- Analyst

Okay. Then looking at that first quarter. Your nominal comparisons especially on a traffic basis look very, very easy. Certainly, Perkins explained part of that but that was before you had really put together all the brand work, major promotional changes, the loyalty changes, what have you. But did you say during another question that you expected same source sales trends to be relatively consistent throughout the year did I hear that correctly?

Wyman Roberts -- Chief Executive Officer and President

We said that obviously the first quarter where you're all having some very significant weather impacts you've probably got a little bit of upside there. But then, we we do anticipate or project that we can continue to grow comp sales and traffic throughout the year.

John Ivankoe -- JP Morgan -- Analyst

Okay. Maybe first quarter about the annual range, I know we haven't luster for a kinship yet, but I guess something has to be above average, and presumably, that will be the first quarter given that comparison. What is your insight of what's happening with Texas and the other oil states that are around it? I know Malcolm will publish that Texas numbers now on a monthly basis considering they're so strong. But what is your insight into these markets in particular and are there laps beyond the hurricanes that we should be sensitive to off, coming into so much much more difficult numbers later in the year.

Wyman Roberts -- Chief Executive Officer and President

I think our experience with the oil markets as they have rebounded. Obviously, we were very well represented in those markets and we were encouraged by the rebound that we're seeing in the markets and in our concepts in those markets. So, I think that they'll start to lap and settle in. But we are also seeing some are pretty broad strength throughout the country frankly. So, we're not concerned about what happened when it'll last? It's not the only thing carrying our momentum and we're excited about what we're seeing in other parts of the country as well.

John Ivankoe -- JP Morgan -- Analyst

Oftentimes, the best-performing restaurant market especially those without very high labor costs or what's going to attract competition and well-branded, well-executed, small-chain independent type of competition I can think. Some of your markets had several of those. But, what is your view on the level of competitive activity as it relates to new restaurant construction year-over-year, and the viability of independence on some of your core markets?

Wyman Roberts -- Chief Executive Officer and President

Well, it's interesting. I think John as you guys try and decide for the macro numbers from Malcolm and from Black Box, and then you evaluate the various earnings calls from the publicly traded large companies, I think you're seeing that the way I see it, things like [inaudible] that the large national brands are doing better than the basic, than the industry as represented in at least in those two major trackers in casual dining. So, I think the independents are-

They're struggling a little more than some people would actually like to acknowledge. There's always going to be the hot item and the hot concept in whatever town you're in, but there's a lot of pressure on a lot of the smaller independent. In the bar and grill category, they continue to make up a big piece of the industry. They're not all the hot new sexy thing, and they're struggling I think with a lot of the headwinds that the industry is facing, and they don't have the leverage, the scale, the insight to deal with it. I think, we're putting a little bit of pressure on them.

John Ivankoe -- JP Morgan -- Analyst

Okay, thank you. Thanks for all the color.

Wyman Roberts -- Chief Executive Officer and President

Bye, John.

Operator

Thank you. Our next question today is coming Will Slabaugh. . Please mention your affiliation then pose your question.

Hugh Gooding -- Stephens -- Analyst

Stephens, thanks for taking my questions, guys. This is actually Hugh on for Will this morning. Going off of that last question. First, I was hoping you could give us some more color on the comp progression and 4Q. Then, going back to that last question, just the inside of the quarter to date period. I know said traffic was outperforming versus peers early in the quarter, but realizing a broader industry looks to slow somewhat in the first month of the quarter to date period. It sounds like you really haven't seen this. I was just wondering if you thought that was more of your exposure to stronger markets or just these initiatives gaining traction?

Wyman Roberts -- Chief Executive Officer and President

Okay. Well, I'll just say in general, you are probably asking for a level of detail that we're just probably not going to give within a period stuff. In general, we felt good about the continued sequential improvement in the plans throughout the year, quarter-by-quarter, improved traffic, improved sales, in Chili's, especially the traffic momentum. As we walked into this quarter, we continue to feel good about the progress we're seeing in the brand and the progression we're seeing. So, the month to month does not going to get into that level of detail.

Hugh Gooding -- Stephens -- Analyst

Got it, thanks. Then stepping back a little bit. When you look the additional focus on value, the investments and food quality leveraging that growing loyalty-base in the off-premise piece, what do you believe it has been the earliest contributor to the same store sales improvement at this point and where do you see the largest opportunity over the course of 2019?

Wyman Roberts -- Chief Executive Officer and President

Well, we've laid out without giving you and anyone else could be listening, a competitively too much insight. We're excited about the things that we've put out there in terms of the base. I experienced that Chili's is focusing on simplification, delivering a better guest experience [inaudible] hotter, faster, and then improving their recipes. We know that makes a difference in the quality of the experience, and that's fundamental to anything we do moving forward.

On top of that, we're very excited about the work that's been done and the momentum we're seeing in take-out. We anticipate that we can continue to grow that business. As I mentioned, it ended that quarter in double-digits. So, the value proposition, and how we bring that to the table, and our ability to the then market using all the different mediums or the things that we're excited about, that the team is working hard to continue to leverage and differentiate relative to some of the competitors that we're seeing out there.

Hugh Gooding-- Stephens -- Analyst

Got it thanks for taking the questions.

Wyman Roberts -- Chief Executive Officer and President

Okay.

Operator

Thank you. We have no further questions in the queue.

Mika Ware -- Vice President of Finance and Investor Relations

All right, great. Thank you, Kate. We appreciate everyone joining us for the call today and we look forward to updating you on our first quarter results in October. Have a wonderful day. Bye bye.

Joe Taylor -- CFO

Thanks everyone.

Wyman Roberts -- Chief Executive Officer and President

Thanks

Operator

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Duration: 60 minutes

Call participants:

Mika Ware -- Vice President of Finance and Investor Relations

Wyman Roberts -- Chief Executive Officer and President

Joe Taylor -- CFO

Nicole Miller -- Piper Jaffray -- Analyst

John Glass -- Morgan Stanley -- Analyst

Jeffrey Bernstein -- Barclays Capital -- Analyst

David Palmer -- RBC Capital Markets -- Analyst

Sara Senatore -- Sanford Bernstein -- Analyst

Gregory Francfort -- Bank of America Merrill Lynch -- Analyst

Chris O'Cull -- Stifel -- Analyst

Robert Derrington -- Telsey Advisory Group -- Analyst

Stephen Anderson -- Maxim Group -- Analyst

Karen Holthouse -- Goldman Sachs -- Analyst

Andrew Strelzik -- BMO Capital Markets -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

John Ivankoe -- JP Morgan -- Analyst

Hugh Gooding -- Stephens -- Analyst

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