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Bloomin' Brands (NASDAQ:BLMN)
Q3 2018 Earnings Conference Call
Oct. 29, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Bloomin' Brands fiscal third-quarter 2018 earnings conference call. [Operator instructions] It is now my pleasure to introduce your host, Mark Graff, vice president of investor relations. Thank you, Mr. Graff. You may now begin.

Mark Graff -- Vice President Investor Relations

Thank you, and good morning, everyone. With me on today's call are Liz Smith, our CEO, and Dave Deno, executive vice president and chief financial and administrative officer. By now you should have access to our fiscal third-quarter 2018 earnings release. It can also be found on our website at www.bloominbrands.com in the investors section.

Throughout this conference call, we'll be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of growth strategies and financial guidance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from our forward-looking statements.

Some of these risks are mentioned in our earnings release from others are discussed in our SEC filings, which our available at www.sec.gov. During today's call, will provide a recap of our financial performance for the fiscal third quarter 2018 and our review of company highlights, a discussion regarding progress on key strategic objectives and an update on 2018 guidance. Once we have completed these remarks, we'll open the call up for questions. With that, I'd now like to turn the call over to Liz Smith.

Elizabeth Smith -- Chief Executive Officer

Thanks, Mark, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted third-quarter diluted earnings per share was $0.10 and combined U.S. comp sales were up 2.9%. This result was in line with our expectation.

Q3's performance marked the seventh consecutive quarter of sales outperformance versus the industry. This reflects the continuation of the momentum we have built from our investments in the core guest experience to restore higher-quality traffic over the medium to long-term. We continue to develop incremental sales layers to accelerate growth. This includes shifting media spend from mass marketing to digital personalization, the Dine Rewards loyalty program and the rapidly growing off-premise business.

Our the strategic investments are gaining traction and are putting us in a position to capitalize on the change in customer dining behavior. Today's consumer is increasingly seeking more convenience in their dining occasions as well as having engaged and interact with brands. We believe our investment priorities are appropriately aligned with these evolving customer preferences, and that momentum in share gains will continue. In addition, we will leverage our scales, portfolio of brands and data analytics to approve engagement with higher ROIs.

Now turning to the brands. Outback comp sales were up 4.6% in the third quarter, with traffic up 0.9%. This is Outback's fifth consecutive quarter of positive traffic and seventh consecutive quarter of positive comp sales. It is clear that the investments we have made to elevate the customer experience are driving healthy sales growth.

As a reminder, these investments were prioritized toward customer-facing improvements across food quality and force enhancement, service upgrades, and improved ambiance. Ensuring our assets are current remain a top priority. We are testing multiple design prototypes for our new interior remodel program. These new remodels will incorporate new design elements to modernize our look and feel while also expanding the off-premise room to handle the higher expected order volumes.

We anticipate it will deliver approximately 3% traffic lift, consistent with prior interior remodels. Once the prototype is finalized, we expect to substantially complete this program over a three-year period. In addition, we are relocating Outback's restaurants as quickly as quality sites become available. Given the strength of the pipeline, we are on track to relocate 14 restaurants this year.

This relocation program continues to deliver impressive results, and recent relocations are generating a sales lift well in excess of 30%. We feel very good about Outback. This is a strong brand with great consumer appeal, the best operators in the business and is well-positioned to take further market share. At Bonefish, Q3 comp sales were up 1.8%.

Our effort to simplify execution, while investing in food and the dining experience has returned the brand to its polished casual roots, more for fresh fish, innovative drinks and superior service. Beginning in October, we rolled out an all new branch manual and expanded branch to Saturday. We continue to migrate our marketing resources away from national toward more impactful local programs. This local philosophy helped define Bonefish as the unchained chain, and it's paying off in sales and profitability.

At Carrabba's, comp sales were down 60 basis points in the quarter. Carrabba's remains focused on building healthy traffic and providing great authentic Italian meals at affordable prices. We have shifted the marketing strategy for more complicated and disrupted LTOs toward excellent execution of the core menu and special occasions. We are also targeting more proprietary programs, such as our successful wine dinners at Amore Mondays as well as growing off-premise via Family Bundles and delivery platforms to drive healthier traffic.

We will be patient in rebuilding traffic based on superior food and execution, and we'll continue to migrate from discounting, which is down 37% year to date. In Q3, Fleming's comp sales were up 0.5% with negative traffic. We made the conscious decision on Fleming's to move away from legacy value offerings, such as our Fried 67 bar menu, $29.95 prime rib and some nonholiday gift card distributions. We anticipated the negative impact on traffic from these actions, however, they have had a positive impact on profitability.

The brand is on track to have record profit. Moving forward, Fleming's will work on differentiating the brand from the traditional high-end steakhouse through localized menu selections and customer segmentation. Our successful Dine Rewards loyalty program is performing well and now has over 7.2 million members. The program is attracting a healthier consumer and driving strong engagement across the portfolio.

We will evolve the program to further leverage the customer segmentation opportunities provided by the data. Our investments in CRM strengthens engagement through more customer-centric communications while providing a higher return for marketing expenses. For perspective, these investments have enabled us to reduce our advertising spend from 3.8% in 2016 to approximately 3.1% over the last two years while improving ROIs. Turning to off-premise.

In Q2, our 240 existing delivery locations began to constantly hit establish targets for several key metrics, including delivery time and deliveries per location. As a result, in Q3, we resumed the rollout of delivery and expect to add an additional 200 locations across Outback and Carrabba's by the end of the year. We anticipate all delivery locations will be completed in 2019. We are very excited about our progress and the incremental opportunity it represents as we capitalize on the growing consumer demand for enjoying restaurant meals at home.

Moving to international. Brazil comp sales were down 3.3% in the third quarter. The country has experienced a difficult environment due to unrest living up to yesterday's president elections. This has led to protests and a lengthy truckers strike that badly hurt the Brazilian economy, causing supply shortages and transportation gridlock that resulting in numerous lost operating days for many businesses, including our restaurants.

We believe these dynamics were more event-driven rather than a reflection of the improving underlying health indicators of the Brazilian economy. GDP is set to have its strongest performance in four years and reduced inflation and interest rates are having a positive impact on consumer demand and disposable income. Therefore, we believe the current situation in Brazil is more temporary. We are already seeing signs of stabilization and experienced stronger trends as the quarter progressed, culminating in positive comp sales as we exited the quarter and an expectation that they will remain positive in Q4.

While the potential for near-term volatility remains, we believe consumer confidence will resume the upward trend it had been on for the last few years now that the presidential elections has occurred. The demand and love for our restaurants remains high and we are performing well in a difficult environment. Most importantly, we remain well-positioned to continue to grow and take share in an underpenetrated casual dining market. In summary, we feel very good about the quarter and the sales we have in place to support continued momentum and earnings growth.

We now expect our adjusted earnings per share to be between $1.41 to $1.47, up from our original guidance of $1.38 to $1.45. This represents growth of between 18% to 23% from 2017. We are on track for a very successful year at Bloomin' Brands. I want to thank our managing partners and JVPs across our concepts for their dedication and support and taking care of our customers and our people every day.

These results would not have been possible without you. And with that, I'll turn the call our to Dave Deno to provide more details on Q3. Dave?

David Deno -- Chief Financial and Administrative Officer

Well, thank you, Liz, and good morning, everyone. I'll kick off with discussion around sales and profit performance for the quarter. Before I begin, I'd like to remind everyone that when I speak to results, I'll be referring to adjusted numbers that exclude certain costs and benefits. Please see the earnings release for reconciliations between non-GAAP metrics and their most directly comparable U.S.

GAAP measures. We also provide a discussion of the nature of each adjustment. With this in mind, third-quarter financial results versus the prior year were as follows: GAAP diluted earnings per share for the quarter was $0.04, versus $0.06 in 2017, adjusted diluted earnings per share was $0.10, versus $0.14 last year. The primary difference between GAAP and adjusted EPS results is related to certain impairment, restaurant closing costs and severance excluded from our 2018 and 2017 third-quarter results.

A primary driver of our year-over-year change in both GAAP and adjusted EPS this quarter was a $7 million change in incentive compensation. As mentioned in our last call, we reduced our Q3 2017 incentive compensation accrual and did not have a similar adjustment in the third quarter of 2018. This change has had a $0.07 negative impact on our Q3 2018 EPS as compared to last year. Total revenues increased 1% to $965 million in the third quarter.

This was primarily driven by a 2.9% increase in U.S. comp sales as well as the positive impact of net restaurant openings. This increase was partially offset by unfavorable foreign currency translation. Adjusted operating income margin was 2% in Q3 versus 2.6% a year ago.

A primary driver of our year-over-year margins this quarter was the $7 million change in incentive compensation that I previously mentioned. This change had a 70-basis-point negative impact on our Q3 2018 margins as compared to last year. Q3 adjusted operating margins were also negatively impacted by commodity inflation and wage inflation as well as lower comparable sales performance in Brazil. These increases were partially offset by productivity initiatives and increases in average check.

It's important to note that the U.S. segment adjusted operating margin was up from last year. Our investments in the customer experience are driving higher quality sales, which is improving our margins. Our international segment margins, which are largely driven by Brazil, were lower year over year.

The Q3 adjusted tax rate was negative 21%. This was $0.02 lower than expected, due primarily for the benefit of discrete tax items as well as legacy stock option exercises within the quarter. Given the unanticipated benefits in Q3, we have updated our tax rate guidance for the year, and I will discuss that more in a moment. Our tax expense is negative for earnings purposes, we do anticipate paying our share of cash taxes for the year.

On the development front, we opened five systemwide locations in the third quarter, including four international locations and one domestic Outback franchise location. We have repurchased $99 million of stocks so far this year. We'll continue to opportunistically repurchase stock in returning cash to shareholders. As it relates to our capital structure, we currently have $400 million of interest rate swaps.

We have huge swaps as a means to fix our interest rates on a portion of our debt. These swaps expire in May of 2019. This past week, we took the opportunity to enter into new $550 million forward starting swaps that will become effective once the existing swaps mature next year. This transaction will not have an impact on our 2018 results but puts our fixed flow mix in a more balanced position amid a rising interest rate environment.

I would now like to take you through some thoughts on our 2018 guidance.First, we now expect U.S. comp sales to be between 2% and 2.5%. This is up from of our prior guidance of 1.5% to 2.5%. This change is driven by the sustained strength in our Outback business.

Second, we expect the adjusted tax rate to be approximately 1% and our GAAP tax rate to be approximately negative 4% for the year. The 2018 tax rate is expected to be lower due to the excess tax benefit of certain legacy stock option exercises as well as the discrete items that I mentioned earlier. Third, we expect adjusted earnings per share to be between $1.41 and $1.47. This represents growth of between 18% to 23% from 2017 on a comparable calendar basis.

The new range is an increase from our original guidance of $1.38 to $1.45. The increase in adjusted EPS expectations is driven primarily by the changes in the tax rate as well as the ongoing a strength in our Outback business. We expect these increases will be partially offset by lower profit in Brazil and the impact of foreign currency translation. Other aspects of our 2018 guidance remain intact.

A final note about our 2018 results. We expect significant year-over-year improvement in Q4 2018 adjusted operating margin, driven by a few key factors: first, we anticipate a $9 million or 90 basis points year-over-year benefit in incentive compensation. 2017 ended better than anticipated and we accrued additional expense on to our year-end results in 2017. Second, we anticipate improved margins in the U.S.

business. Our investments in the customer's business are paying out. We are seeing healthier traffic and improved flow through that we expect to carry over to the fourth quarter. Finally, as Brazil moves past the recent elections, we expect to capitalize on our leading market position and return to market growth in our international business.

Given the strength of our fourth-quarter margins, we anticipate positive operating margin growth in 2018. Please keep these in mind as you assess our fourth quarter. I would now like to provide a couple of brief thoughts on 2019. First, we expect to have positive U.S.

comp sales continue our momentum from 2018. Second, we will have meaningful margin expansion in 2019 as we work to close the gap versus our peer group. We'll provide more details on these and other items, including EPS, on our February call. In addition, we will be hosting an investor meeting shortly after issuing our Q4 results.

In summary, Q3 was a very good quarter for Bloomin' Brands. We remain confident that we are making the right and necessary investments to support long-term growth. Clearly, our investments in the core customer experience are paying off. We remain disciplined stewards of capital, and our improving capital structure provides increased flexibility to return cash to shareholders.

And with that, we will now open up the call for questions.

Questions and Answers:

Operator

[Operator instructions] Our first question is coming from the line of Michael Gallo with C.L. King. Please proceed with your question.

Michael Gallo -- C.L. King & Associates -- Analyst

Hi, good morning.

Elizabeth Smith -- Chief Executive Officer

Good morning, Michael.Just a couple of questions. Obviously, you've had now really strong performance at Outback for really the last couple of years, but particularly on the traffic side, for the last -- certainly, the last year. I guess as you get into those more difficult laps, you've been able to put forth healthy level of traffic, it hasn't been driven by discounting. So I was wondering if you could give us some thoughts on how you sustain that momentum as you go through 2019 in a casual environment that continues to be fairly choppy.

And then just kind of a follow up to that. How you plan to kind of do that? And as Dave said, materially improve the operating probability at the same time. Thanks

Sure. So I have never felt more confident in the brand health and Outback and where Outback is, and that gives us a lot of confidence that this is not about lapping. And as you said, it's about seven consecutive quarters of same-store sales overperformance, pretty significant as well as five consecutive quarters of positive traffic. And we feel very comfortable with where Outback is going to perform in Q4 as well as in the future.

And I think what really gives us those confidence is the brand health and momentum. We have invested ahead of growth and now we are able to monetize those investments. And we investment -- we invested in areas of where the consumer wants to go. That's in food quality, portions and service.

Our exterior remodels now pivoting to interior remodels, driving 4% to 5%. Our CRM and our mass personalization, a lot of time and patience went into adjusting -- into investing capital dollars ahead of growth to build our data's infrastructure capabilities. And now we're monetizing it. Our CRM program and our Dine Rewards program has 7.2 million customers.

And we're kind of where we had [Audio gap]

Operator

Ladies and gentlemen, please stand by. We are experiencing technical difficulties.

Elizabeth Smith -- Chief Executive Officer

Hello everyone, this is the Bloomin' Brands team rejoining the conference call.

Operator

Thank you. Mr. Gallo, please continue with your questions.

Michael Gallo -- C.L. King & Associates -- Analyst

Yes. I think I had asked it. I think -- not sure where it cut off. But I think I was asking about continuity momentum.

I think it was kind of halfway through.

Elizabeth Smith -- Chief Executive Officer

OK. Sorry about that, Michael. All of our lines in our buildings are down. And I'm particularly disappointed that it got cut off during Outback because I love talking about Outback and Outback's performance.

So just to briefly catches up. We're not concerned about lapping because we have built multilayers that are based on brand health and where the consumers are going. So momentum is going to continue to beget momentum. I haven't ever -- we felt this confident in Outback's forward momentum.

And that's centered around the investments that we have made in the box, on quality, service. The vast majority of our strength is our in-house traffic and that's directly applicable to superior execution that we're having in the box. We got the best operators in the business with Gregg, Scarlet, and the entire team. And that's what's driving the in-store volume.

The other things on the layers that we built in terms of the remodels have been to now to interior. We also spent an awful lot of time investing ahead of growth in the data, infrastructure and personalization. And now we're seeing the benefits and the fruits of that. And we're monetizing that whether it's been in form of Dine Rewards, staying up to 7.2 million or moving from mass marketing to data personalization, which has much higher ROIs.

And then finally, I would just say off-premise continues to really rock for us. It's proving to be highly incremental. And so when you look at the sales layers that are out in front of Outback, it's not a quarterly discussion or quarterly concern, it's just feeling like we really positioned this brand exceptionally well for the future. And that volume is going to continue to flow through and drive operating margin expansion.

Dave, I don't know if you want to elaborate on that?

David Deno -- Chief Financial and Administrative Officer

Yes, sure. Thanks, Liz. And I'll talk about Q3 like I talked about in my prepared remarks. Our operating margin was up year on year when you normalize the incentive comp down last year, first of all.

But you look at things that we're doing to drive margins. The investments in the business are behind us and we've made them. They're working. And we've now trying to monetize those for the food and labor investments that we've made.

We have terrific tools in our restaurants. If you saw our labor cost, this quarter looked good. And then finally, we had a sale-leaseback program that was really successes economically. It did cost us some margins.

And we've begun to anniversary that. That won't be a headwind anymore. So time to monetize investments, manage our tools, and anniversary our sale-leaseback program, like I mentioned we're going to have a significant margin expansion in Q4 and that will set us up well for 2019.

Michael Gallo -- C.L. King & Associates -- Analyst

Thank you.

Operator

Our next question is coming from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein -- Barclays -- Analyst

Great. Thank you very much. Just following up, Liz, on your confidence around the Outback brand. It does seem like your guidance implies the fourth quarter for the system would be flat to up 2% comps.

But I'm just wondering with your confidence on Outback and you now start to lap the much more difficult compares, without necessarily giving intra-quarter comps, but just because the trajectory changes so sharply in terms of compares and you've implied the fourth-quarter system, any color around October to demonstrate that confidence or what you think the Outback comp would come out in the fourth quarter, specifically?

Elizabeth Smith -- Chief Executive Officer

Thanks, Jeff. So as you know, we don't give intra-quarter guidance. But I just want to reiterate that everything about the Outback comp makes the year-ago comparison less relevant as it relates to our continued momentum. I have complete confidence in the strength of Outback.

We look forward to reporting on the fourth-quarter trends. I think the trends -- I think the guidance is prudent. But we feel terrific about how Outback has performed and what we expect it to perform in Q4.

Jeffrey Bernstein -- Barclays -- Analyst

Got it. And the trends of the non-Outback brand and it seems like comps were below consensus at each brand, and the two-year trends decelerated, especially at Carrabba's and Bonefish. I'm just wondering how the actual results compare to your internal expectations whether you're pleased or disappointed with the trajectory, the brand? It seems like maybe there's a divergence now. We're increasingly confident in Outback but perhaps, trends aren't going as well as the other two brands.

Any color would be great.

Elizabeth Smith -- Chief Executive Officer

Sure. So our -- the other three brands have all been in the kind of 18 months to two-year multi-journey to taking out discounting out of the base. And so we -- and by the end of this year, we feel really good about the fact that we will have finished for all intents and purposes, the traffic decline that we anticipated from pulling significant discounting over -- out of the base. And then we are going to be able to monetize the investments as we put in those brands.

And the portfolios has reached the point where we will, by the end of the year, we will have lapse the majority of the discount pullbacks and it will not be the traffic headwinds that it has been over the last two years. We certainly anticipate our traffic to then strengthen as we head into. As it relates to the brands specifically, because of the discounting that we pulled back, we did anticipate traffic declines. And it is showing up in a much higher quality traffic that's coming back.

So for example, on Fleming's and Bonefish, we ripped out a lot of discounting. And you see the results is in a healthier traffic. And they're both on track to have record profitability. So we feel very good about where those brands are and where they're going.

No concerns with that. Carrabba's has been a longer road back for us because, frankly, we pivoted long -- further away from -- and further a longer away from its core proposition, which is authentic Italian dining at affordable prices. And so actually the portfolio gives us the strength of the portfolio and how the others are born gives us the ability to be patient as we finish taking those tactics out that we're less on strategy. Discounting is down 37% this year.

And we continue to see the strength as a benefits of divesting in differentiated programs, such as wine dinners, such as Amore Monday, such as our off-premise business. So I think the way we've managed the portfolio with the strength of Outback has given us the ability then to put the Outback playbook in effect of all the others in getting the discounting out, that will be behind us as we exit Q4. So we're looking for certainly a lot more traffic strength as we enter next year.

Jeffrey Bernstein -- Barclays -- Analyst

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of John Glass with Morgan Stanley. Please proceed with your question.

John Glass -- Morgan Stanley -- Analyst

Thanks. Good morning. Could you speak a little bit about your enthusiasm around margins for next year? And maybe in the context -- in 2018, are there discrete one-time cost, and I think you've talked about on the time that won't recur so we can kind of frame what that opportunity is? And then when you look at your U.S. restaurant margin that was flattish this quarter, maybe up ex the incentive comp, it's still a bit lower than the peers.

How do think about where the biggest areas of opportunities within that P&L are then for you to start to close that gap?

David Deno -- Chief Financial and Administrative Officer

Yes. Sure. We have opportunities in managing the restaurant costs in food and labor. And if you look at our Q3 labor cost, they're in really good shape.

And we have opportunity to continue to closely manage our overhead. We are very committed to 0 overhead growth and getting leverage -- being leverage on that. So those three or four things, John along with same-store sales growth out of the box as we continue to elevate same-store sales and traffic in our box, will really help us on the margin side. And like I mentioned, we will see on the delivery -- excuse me, on the Q4, we will see a pretty significant margin expansion as a result.

The things that we are anniversarying is, I mentioned earlier, we're coming off of sales leaseback program. That's pretty much behind us. Great economically but it was a bit of a headwind on margin. And the investments in food and labor costs are behind us as well.

Now it's time to monetize those things. So that will be important. And then finally with Brazil, we have an outstanding business there. The events of the year are -- have happened and they're behind us.

And our business continues to be very strong. Liz talked about the brand returning, the same-store sales growth in Q3. And those things will all come together to help us expand margin as we go forward.

John Glass -- Morgan Stanley -- Analyst

And just -- so just follow up. The 2019 is really just about anniversarying some of the cost headwinds you had this year, not that they were one-time discrete or large enough to call it discrete items this year just won't recur it, it's just that you don't -- they're not unfavorable next year versus this year, is that what your point was?

David Deno -- Chief Financial and Administrative Officer

That, John, is -- the only discrete items is the investments in the business, it's the work we do every day on productivity in the restaurants and the home office and it's growing sales in the box. And we're very, very bullish about Q4 margin and margins for next year as a result.

Elizabeth Smith -- Chief Executive Officer

And the only [Audio gap] of our comps or sales growth. That's a pretty significant year-over-year change for us. Brazil's had 20-plus years of great performance. It's back on track and performed actually quite well in a difficult environment in 2018.

But no one sees that continuing at this point. Although we certainly don't control that, but it feels very good as we head into that.

John Glass -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from the line of John Ivankoe with J.P.Morgan. Please proceed with your question.

John Ivankoe -- J.P.Morgan -- Analyst

We're just hoping to get an update on delivery, just your overall confidence in expanding that. If it's possible to talk about maybe by cohort or however -- by quartiles, however you want to talk about it. How big of an incremental sales you are seeing in some of your more mature delivery markets? And then secondly, I mean, as you have more experience and more time on this project of it doing it in-house with your own employees or versus third-party in terms of how that shift and that may not be happening going forward?

David Deno -- Chief Financial and Administrative Officer

Good morning, John. First of all, we are thrilled with how delivery and off-premise is performing. We believe that it will be -- continue to be a major opportunity for our company. Off-premise in total yielded into 25%-ish plus in sales.

So we will -- we really think that that would be an opportunity for us as we continue to move along. We took the time that we had -- we rolled out 240 restaurants. We took the time to really get those absolutely humming and right and delivery times and flow through and everything else. That has happened.

And now we are rolling out an additional 200 locations at the back half of this year. And we expect all restaurants that are eligible for delivery to be competed with delivery in 2019. We have -- off-premise is now about 30% of our business. And it grew in the low double-digits in Q3.

So everything about that business is really coming together. Why is that? Well we built the in-house capability to make that happen. And we're very pleased with the adoption of our teams of doing that. And it gives us the data.

It gives us that our process flow through. It gives us complete control of customer experience as we go forward. We will be testing an omnichannel approach. So we are testing with third parties.

But clearly, we are very pleased with the internal team we developed and the adoption by our operators. So John in wrapping up, we just see the deliver opportunity to continue to be a very big opportunity. Delivery and off-premise, will be a very big opportunity for our company.

Elizabeth Smith -- Chief Executive Officer

John, the only thing that I would add is that we do have, to your point, kind of a test market and the difference layers that we have rolled out delivery in our highest performing marked restaurants, which are not one this or two this. We do see validation for our belief that this will get to 25% to 30%. The restaurants that we are rolling out this year because there's so much excitement in an opportunity in the box of being so embraced have started out of the gate extremely strong. So everything about delivery is exactly where we hoped in many respects on the top quartile of our restaurants.

It certainly is provide validation for our belief that this is: one, incremental; and two, it's absolutely where the customers going. They want to enjoy restaurant, quality food, many times in the comfort of their home. So that is what's given us the confidence to continue to roll that in the infrastructure and the operating metrics that we're hitting where -- what's the customer demands for delivery.

Operator

The next question is coming from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.

Jeffrey Farmer -- Gordon Haskett -- Analyst

Just a couple on Dine Rewards. So what is the visit frequency for your Dine Rewards customers compared to those who are not? Have you guys ever shared any metrics on that?

Elizabeth Smith -- Chief Executive Officer

Jeff, for competitive purposes we have not broken out that frequency. It's certainly having a positive effect on various levels of the engagement funnel.

Jeffrey Farmer -- Gordon Haskett -- Analyst

OK. Just -- and sticking with Dine Rewards, a little bit different topic. I think you mentioned close to 600,000 new Dine Rewards customers per quarter. I think you've been maintaining the run rate close to that over the last several quarters.

So the question is, how long do you think you can maintain this pace? Is there sort of an optimal membership level that you're targeting?

Elizabeth Smith -- Chief Executive Officer

Well, we certainly believe that because of the attractiveness of the program and the success. And if you look at the -- if you look at all the ratings of the loyalty program as well as our app, we certainly believe that we're still in the early innings of our loyalty journey. We are now getting the data and developing very specific data customer profiles for our Dine Rewards program which enables us then to market directly to the customer and have enhancements that could drive frequency further. Now I don't want to get further ahead but certainly, there's loyalty.

We are in loyalty 1.0 with a facility now that we have the customer files to monetize that in a much more efficient and effective way. So this is going to continue to be a significant growth lever as well as differentiator for our portfolio.

Jeffrey Farmer -- Gordon Haskett -- Analyst

Alright. Thank you.

Elizabeth Smith -- Chief Executive Officer

Thanks, Jeff.

Operator

Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your questions.

Brian Vaccaro -- Raymond James -- Analyst

Thank you and good morning. Just a quick follow up and then move to the margins real quick. But a follow up on off-premise, you said I think, 30% of sales and double-digit growth year over year. Was that an Outback-specific comment?

David Deno -- Chief Financial and Administrative Officer

No.

Elizabeth Smith -- Chief Executive Officer

No.

Brian Vaccaro -- Raymond James -- Analyst

Could you provide that on an Outback-specific basis?

David Deno -- Chief Financial and Administrative Officer

We don't. But the numbers aren't materially different.

Brian Vaccaro -- Raymond James -- Analyst

OK. A couple on the third-quarter margins, if I could, just the food cost line was higher than we had expected, at least, internally. And can you help us understand what drove that 80-basis-point increase? Was there a particular item or category that might have caught you by surprise? And maybe more importantly, how should we think about the commodity outlook in Q4 and into '19?

David Deno -- Chief Financial and Administrative Officer

Yes. We saw food costs [Inaudible] unique in Q3. We feel very good about Q4 commodities. We feel good about 2019 commodities.

[Inaudible] making some decisions on some of the buys we're going to make and things. Q3 was all about just the timing of various contracts for the most part and how they came together within those particular 90 days. The year is fine. Q4 is fine.

We did have a lot of elevated crab in Q3 but nothing really significant. So it's more -- I mean, Brian, it was just more about how the timely the contracts came together. Q4 is fine, full year is fine, and we expect a good guidance, 2019, when we get there.

Brian Vaccaro -- Raymond James -- Analyst

OK. That's helpful. And sticking with the third quarter, that other opex line. So nice to see leverage 30 or 40 bps there.

What was the ad spend year on year in the quarter?

Elizabeth Smith -- Chief Executive Officer

It was basically flat from a dollar standpoint. It's basically flat.

David Deno -- Chief Financial and Administrative Officer

Yes. yes. And that -- you're seeing there, Brian, some good productivity initiatives as well, the energy side and everything else.

Brian Vaccaro -- Raymond James -- Analyst

OK. And then last one. On the G&A side. So dollars around $65 million on an underlying basis, it was kind of flat in dollars year on year despite a $7 million increase in incentive comp that you called out.

Is there any timing shift that we should be aware of? Or does that reflect underlying savings in that line? And if so, where? And then could you provide an update on your annual expectation, the 2018 G&A line?

David Deno -- Chief Financial and Administrative Officer

Yes. That is a direct reflection of the very tight cost management. We're trying to do an overhead here, especially when we consider that flat year on year, even though we had a $7 million benefit last year from the incentive spend. And so there we're just continuing to push forward on our productivity initiatives and everything else in the headquarters office.

I really want to call out, for instance, our economy and control team and our IT team really working hard to manage cost in that area while getting better and better every day. And they're doing a fantastic job. So I think there, Brain, it's a matter of the efforts that we're doing to manage G&A every day.

Brian Vaccaro -- Raymond James -- Analyst

OK. And then just last one for me. On delivery, sorry if I missed it, how many units were covered by delivery at the end of the third quarter?

Elizabeth Smith -- Chief Executive Officer

Well, we had 240. And we've told you that over the back half of the year, we're rolling in another 200. So we're not going to get intra-quarter numbers, but we will provide that perspective as we roll that 200 out. We expect our delivery locations to be fully rolled out by the end of 2019.

Based on everything we're seeing, we're very bullish on that.

Brian Vaccaro -- Raymond James -- Analyst

OK. And on that '19 -- sorry, how many units do you envision that that will include that are sort of -- you said I think you were -- you used the word eligible. How many units is that?

David Deno -- Chief Financial and Administrative Officer

We're looking at -- it's a little too early to get a definitive number. I'm guessing 70%, 80% of the Carrabba's and Outback system-ish would be that. But yes, we work through it, Brian, we'll provide more color commentary. That's kind of what I'm -- what we're guessing.

Brian Vaccaro -- Raymond James -- Analyst

All right. Great. Thank you.

Operator

The next question comes from the line of Gregory Francfort with Bank of America. Please proceed with your question.

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

Guys, I have two questions. The first is just the housekeeping one. So just on the tax rate guidance, what does that imply for the fourth quarter? Is it something like a mid-teens positive tax rate or is my math wrong? And the other question I have was just on average check. I think you've been running kind of in the 3 1/2-ish range, how much of that is from delivery? And is that maybe something like 2 1/2 or 3 on sort of an underlying basis? And then where do you expect that to trend over time? Do you have pricing power where you can keep it at this range? Or does that something you need to pare back a little bit as we go forward?

David Deno -- Chief Financial and Administrative Officer

Well, on the tax rate, we'll expect a more normalized rate in Q4, which should be kind of the low double-digits area. We don't really forecast the timing of any kind of legacy option exercises and those kind of things. But that's kind of what it looks like. And I'll throw it to Liz on the PPA side.

Elizabeth Smith -- Chief Executive Officer

Sure. So just keep in mind what you're seeing flowing through is our pulling back from discounting, right, versus growth pricing. So our pricing has always been priced kind of moderately in line around that 2%, 2.5%. The average check is benefiting from pulling out the legacy discounting.

[Inaudible] to 0 this year. We eliminated 5, 6, 7, and $29.95 roast beef at Fleming's. That's what driving the -- versus any growth pricing. Now, as is relates to pricing for next year, we'll give more wholesome guidance, but our philosophy on that hasn't changed.

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

OK. And then maybe if I'll do one follow up. Just who are you taking share from in this environment? And maybe what has been the biggest drivers of the share gains?

Elizabeth Smith -- Chief Executive Officer

Well you know -- as you know this is a highly fragmented category, right? So it's a $90 million category. And so you kind of take share from everybody as it relates to it. It's not such a concentrated category that with the sources and uses, you can pin it down. So you just look at it overall and you say, we're getting increased frequency, new users, and new locations on Outback, and that's siphoning volume from others that aren't growing.

The good news is that with the layers that we've built, we are -- as I've said a couple of times on this call -- we're more confident than ever in Outback's ability to continue to take share because the investments we've made, which are now monetizing across the portfolio, are driven by where the consumer wants to go. And I think that's why we're seeing the success and why we're going to continue to gain share.

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

Thank you. Appreciate it.

Operator

The next question comes from the line of Karen Holthouse with Goldman Sachs. Please proceed with your question.

Karen Holthouse -- Goldman Sachs -- Analyst

Hi, thanks for taking the question. It's pretty encouraging commentary on the pipeline for relocates. And should we think of that as something that actually be more than 14 or that could even accelerate into next year? And how does it sort of tie into an overall framework for unit growth? Is there also sort of similarly positive thoughts on the pipeline for what could be sort of outright new to units next year?

Elizabeth Smith -- Chief Executive Officer

Sure. I'll comment. And then Dave. We are relocating these as fast as we can get the pipeline because we every time we relocate an Outback, we're seeing that 30% to 50%.

So on average of 40%, and just great things happen. So this is a brand when it's given the right real estate, the AUVs in the box are terrific. So we're doing that as quickly as we can. It took us a while given the competition for sites, as you know, in this category to build back price line.

We would love to go faster on the remodels. The source of our paces is supply, because we're looking for those A quality sites. So we're going to do that as quickly as we can. As it relates to Outback, we've talked before about -- we see an opportunity for 50 incremental Outbacks.

And that's also the pace at which we're able to do those. They're also going to be governed by the supply that's out there. You still have a tremendous amount of restaurant, new restaurant competing for the same basis while other restaurants are hanging onto A sites. So it's a function of the category, but we'll relocate as quickly as possible.

We see an additional 50 Outbacks as a real opportunity. We'd like to get those sites. And then on the Fleming's front, as you know, our last five Fleming's have just been terrific and opened well above the system average. But then so we're always on the look out for those.

So we feel very good about Outback's opportunity for reloads and new incremental units. We'd love to go faster. It's a function of supply.

Karen Holthouse -- Goldman Sachs -- Analyst

Thank you.

Elizabeth Smith -- Chief Executive Officer

Thanks, Karen.

Operator

Our next question is coming from the line of Matthew DiFrisco with Guggenheim Securities. Please proceed with your question.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Thank you. Just had a couple of follow-up questions. I guess with the 70 basis points in the U.S. related to the composition.

Is that all primarily at the Outback brand or is that evenly sort of shared across all the brands?

David Deno -- Chief Financial and Administrative Officer

Yes, that was 70 basis points last year when we took incentive comp down. Has nothing to do with this year, and spread across the company.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. So I guess, in the commentary you said you're at the record margins for Fleming's, record margins for Bonefish. And obviously, you had such a strong comp at Outback, I'd have to think they're up year over year. So in the U.S., is it just purely Carrabba's, then, that would be considered to be down on a brand basis, on a restaurant-margin basis, year over year?

David Deno -- Chief Financial and Administrative Officer

Yes, we were talking about restaurant profits at those two brands. And we don't get into margin guide by brand. But like I mentioned, Q3 in the U.S. was up.

And Q4 we see very strong outperformance coming. But we were referencing record profit in those two brands.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Profit. So profit dollars is what you're saying?

David Deno -- Chief Financial and Administrative Officer

Yes, sir.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

OK. So that just then reflects the more stores being opened I guess or -- but if you were to say on a margin basis for 14 -- or 4Q, are you going back to levels that you saw maybe back in 2016? Or are we still a ways away from that?

David Deno -- Chief Financial and Administrative Officer

Nothing in that kind of granularity on the guide, but I think you'll see significant margin expansion year on year. And we think we've got a 250 basis points-ish opportunity in margins. And we're going to make significant progress on that quickly.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Excellent. Last question, Carrabba's. Are there a certain amount of stores, have you done the analysis on how many of those might be potentially sort of at that level where it could be addition by subtraction? And either they would benefit from closing the overall base? Or are they negative cash flow independently? Are we -- is that base being sort of looked over and cleaned out? Or is there some opportunity there may be to rationalize some of the underperforming stores?

David Deno -- Chief Financial and Administrative Officer

Yes, we do a very robust review of our closures and cash flow of our restaurants, and we don't anticipate any significant Carrabba's initiatives. But we'll look at everything each quarter, all of our brands. We don't anticipate a large Carrabba's exposure initiative.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

And then does the Brazil problems, in the near term, does that influence the growth strategy for the Carrabba's brand down there as well or the Abbraccio?

Elizabeth Smith -- Chief Executive Officer

Yes. No, I mean the good thing is about Brazil is I think we've made a pretty compelling case that you should feel comfortable that it was event-driven and we're kind of back on track. We exited with positive comps, that was across both of the brands, and expect positive comps in Q4. And then -- so I think you should feel good about the fact that Brazil is continuing to be a terrific investment for us.

We have 12 Abbraccio down there performing extremely well. We have about 92 Outbacks. There's no reason in our mind why Abbraccio shouldn't enjoy the success of the runway of the Outbacks considering Italian is the No. 2 category down there beside next to Beats and that casual dining significantly under-penetrated.

So I think you can never call the international markets. But I think we feel like it's a thumbs-up for Brazil. And feel very good about how Abbraccio is performing.

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Thank you.

Elizabeth Smith -- Chief Executive Officer

Thanks.

Operator

Our next question is from the line of Sharon Zackfia with William Blair. Please proceed with your questions.

Sharon Zackfia -- William Blair & Company -- Analyst

Hi, good morning. So a follow-up question on delivery and then also a question on marketing. On the deliver side, I guess of that 20% to 30% of Carrabba's and Bonefish -- I'm sorry, Carrabba's and Outback that likely won't get delivery? What are the common dynamics behind those restaurants? And then secondarily, could you break out in your marketing spend what percent is now in digital?

David Deno -- Chief Financial and Administrative Officer

So I'll take the delivery fees and turn it over to Liz. But on the marketing side, it's mainly, Sharon, just world trade areas or trades which have don't have enough households] for delivery penetration. But we'll continue to always look at that piece of opportunity. That's why we are -- there is a range.

I gave with a range. We'll find out further, but that's typically the gist of it.

Elizabeth Smith -- Chief Executive Officer

The only other thing I'd add is, we are going to take an omnichannel approach. We always want to be customer-centric. So if a customer wants to get our party -- our product, our delivery through a third-party aggregator and it's available, we're looking at that. Some people have different ways that they go the market.

On the marketing front, we never break out what -- because as a percentage of sales on TV, on digital. But it's a great question. What I will tell you is that all of our ROI and analytics and the data that we've been building has allowed us to do two things: one, is get more efficient and effective with our marketing spend. So you saw it go from around 3.8% to 3.1% last -- 3.2% last year, 3.1% this year.

And we have shifted a big portion into digital and to data personalization where we're communicating one on one. So for competitive purposes, I don't want to get into specifics, but I will say is that the investment we made in the IT infrastructure to be able to track that and identify it and monetize it is going to increasingly payoff for us.

Sharon Zackfia -- William Blair & Company -- Analyst

Thank you.

Elizabeth Smith -- Chief Executive Officer

Thanks, Sharon.

Operator

The next question comes from Andrew Strelzik with BMO Capital Markets. Please proceed with your questions.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Good morning. The first question I want to ask about the remodel that you're talking about at Outback. Sounds like it's a lot more than it may be just the updated look and feel that we might normally see, shifting to meet increased demand. So can you talk about the types of things that you're looking to achieve there? And maybe where your priorities are? Any specifics around what you're trying to do.

Elizabeth Smith -- Chief Executive Officer

Sure. So the remodel program. We have a number of prototype in market. We're seeing which one effectively addresses all the revenue opportunity.

We will be bumping out our to-go rooms is a reflection of what we are seeing in our top quartile and what we anticipate it becoming. Remember, we said that we believe that will be 25% to 30% over -- in time, and that it will be wholly incremental. So some of the remodels in addition to kind of updating the look and in the flow will be about bumping out that to go room to service entry and exit for delivery as well as to go. I do want to -- I'm sure you know that we're not looking at a capital expenditure on those interior remodels that is anywhere different from our prior spending on interior remodels.

So in that kind of $300,000 to $400,000 range, depending on the size of the box. And -- so for us it's -- that's probably the biggest difference in addition to contemporizing the interior flow and where we kind of adding more seats because we're seeing in-house traffic grow. And so we'd love to be able to put more seats in the box as well.

Andrew Strelzik -- BMO Capital Markets -- Analyst

That's very helpful. Thanks. And my other question is just on Dine Rewards. Now that you do have the customer files and you're looking at doing more of the segmentation.

Is there a strategy in place without might start to push customers to different brands? I know before prior, it's been more across all of the brands that have really seen the benefit. I mean is there any desire to do that? Or as you're segmenting out your clients, your customers?

Elizabeth Smith -- Chief Executive Officer

Well, I just want to clarify. When you say push to other brands, I'm assuming you mean cross-fertilize across our brands?

Andrew Strelzik -- BMO Capital Markets -- Analyst

Correct. I mean as you see the types of customers that they have, that they might apply to other brands, that they go toward those type of things.

Elizabeth Smith -- Chief Executive Officer

Yes. We absolutely are seeing a lot of the traffic lift associated with introducing customers of one brand to another brand. And that is why you've seen somewhat success on a two-year basis associated with the program, is that when we say it's increased frequency, it's not just increased frequency against that customer, in many cases, within that brand, but it also introduces them to another brand. We've really seen that on Fleming's as well.

So it's working exactly as we'd hope. And I think it's another example of where you would have this benefit of having the tightly edited portfolio that serve different eating occasions. And we're seeing that cross-fertilization and that's a big part of what's going to be the plan going forward as well.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Great. Thank you very much.

Elizabeth Smith -- Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Liz.Smith for closing remarks.

Elizabeth Smith -- Chief Executive Officer

Thanks, everyone, for joining us today. We very much look forward to updating you on our portfolio on our Q4 call where will be in a position to talk more about 2019 as well. Thanks all.

Operator

[Operator signoff]

Duration: 56 minutes

Call Participants:

Mark Graff -- Vice President Investor Relations

Elizabeth Smith -- Chief Executive Officer

David Deno -- Chief Financial and Administrative Officer

Michael Gallo -- C.L. King & Associates -- Analyst

Jeffrey Bernstein -- Barclays -- Analyst

John Glass -- Morgan Stanley -- Analyst

John Ivankoe -- J.P.Morgan -- Analyst

Jeffrey Farmer -- Gordon Haskett -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

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

Karen Holthouse -- Goldman Sachs -- Analyst

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Sharon Zackfia -- William Blair & Company -- Analyst

Andrew Strelzik -- BMO Capital Markets -- Analyst

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