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Bloomin Brands (BLMN 2.28%)
Q2 2022 Earnings Call
Jul 29, 2022, 8:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Blooming Brands fiscal second quarter 2022 earnings conference call. [Operator instructions] It is now my pleasure to introduce your host, Mark Graff, senior vice president of investor relations. Thank you, Mr. Graff.

You may begin.

Mark Graff -- Group Vice President of Investor Relations

Thank you, and good morning, everyone. With me on today's call are David Deno, our chief executive officer; and Chris Meyer, executive vice president and chief financial officer. By now, you should have access to our fiscal second quarter 2022 earnings release. It can also be found on our website at bloominbrands.com in the Investors section.

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

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Some of these risks are mentioned in our earnings release, Others are discussed in our SEC filings, which are available at sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal second quarter 2022, an overview of company highlights and an update to 2022 guidance. Once we've completed these remarks, we'll open up the call for questions. And with that, I'd now like to turn the call over to David Deno.

David Deno -- Chief Executive Officer

Well, thank you, Mark, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q2 2022 diluted earnings per share was $0.68 versus $0.81 in Q2 2021. While results were below last year, our Q2 earnings per share was nearly double of what we achieved in 2019. As it relates to 2021, we are lapping exceptional earnings due to stimulus payments and pent-up consumer demand.

In addition, Q2 was also the highest inflationary quarter of the year. We made a conscious decision to preserve our value equation and not raise prices to fully offset inflation. We believe this short-term decision will have long-term benefits for the business. The confidence in our strategy, both domestically and internationally, is reflected in our increased revenue guidance.

This was driven in large part by the success we saw in our sales initiatives through the first half of the year and the marketing investments we are making in the back half of the year. During the quarter, we saw positive trends through May, but experienced softer trends in June, consistent with the industry. Fortunately, the comprehensive plan we established to build a stronger, leaner operation-centric company laid a solid foundation for us to navigate this challenging environment. We leveraged our leading off-premises business growing digital capabilities and improved operational efficiencies to deliver on our key commitments.

These results would not have been possible without the talented and dedicated employees in our restaurants and the restaurant support center. Your commitment to providing guests the highest level of service and hospitality is what make our restaurants so successful. As we look ahead to the balance of the year, the focus remains on achieving our full-year objectives despite a more challenging economic environment. We continue to have confidence in executing our strategy to elevate the customer experience while driving sustainable sales and profits.

The plans in place set us up well to achieve our objectives, strengthen the business and provide momentum for 2023 and beyond. The key elements of our plan include: first, grow in- restaurant sales by improving service levels and food offerings. The investments made over the past few years to elevate the customer experience are showing up in improved social, especially at Outback. As part of this effort, we continue to look for ways to simplify the business to improve execution and consistency.

We are rolling out several innovations such as new cooking technology, including advanced grills and ovens to improve food quality and productivity. We are also installing kitchen display systems for meal pacing and handheld technology for our servers. These innovations should reduce costs and further improve customer service. We are also deploying more targeted marketing to build awareness and drive frequency.

These initiatives are aimed at highlighting our great menu and the everyday value that we offer to guests. Importantly, this is accomplished without sacrificing product quality or the guest experience. In addition, these programs offer high returns and are not reliant on deep discounting to drive traffic. Second, expand our leading off-premises business.

We continue to capitalize on our strong carry-out delivery capabilities. Retention levels held steady with Q1 and are contributing to sales outperformance Third-party delivery continues to grow even as people are returned to in-restaurant dining. Importantly, profit margins in this channel are comparable to margins of the in-restaurant business. This is the result of initiatives that were completed in the past few quarters.

We are also pursuing catering opportunities as people continue to return to offices. We offer significant value through our bundled platforms, which includes group platters for large parties and/or individual box options. We expect off-premises to remain a large and growing part of the business going forward. Third, leverage operating margin gains by growing sales and reducing costs.

This starts by growing healthy traffic across the in-restaurant and off-premises channels. We also reduced reliance on discounting and promotional LTLs and pivoted advertising spend toward more targeted, higher-return digital channels. In addition, we remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in food, labor and overhead. As Chris will discuss, despite large increases in food and labor inflation, we've been able to achieve our operating margin objectives.

We remain committed to our long-term goal of 8% operating margins. And finally, become an even more digitally savvy company. In Q2, approximately 75% of total U.S. off-premises sales were through digital channels.

Last year, we implemented a new online ordering system and mobile app to support our digital business. These technology initiatives are aimed at creating a frictionless customer experience, while also enhancing customer engagement. Both have outperformed expectations and the new app has over 2 million downloads. You can expect to see more activity as we improve the functionality and features of our app and digital offerings.

These priorities will continue to guide us in 2022 and beyond. Because of the momentum we have seen in so many areas and a much stronger balance sheet, we are in a position to begin growing our restaurant base in a meaningful way once again. Last quarter, Mark Graff talked about our new and revitalized development plans. We are making good progress building a strong pipeline of new units, and we expect to accelerate new unit growth in 2023 and beyond.

Our growth priorities are: first, accelerating new unit growth at Outback. We developed a smaller and less expensive prototype that will enable more meaningful growth with healthy returns. This includes pursuing new trade areas in rapidly growing markets as well as fill- in opportunities in major metro areas. To date, we have opened four new smaller locations with strong sales and positive guest feedback.

Consumers are taking notice of the new design and are giving us high marks on the brighter ambiance, decor, redesign bar and new service model. In addition, we continue to upgrade and contemporize our asset base. Investments in remodels are offering good returns and recent relocations at Outback are providing outsized sales look and volumes exceeding $4.6 million, well above the system average. Second, opening new restaurants at Fleming's.

The business continues to perform extremely well and is a proven category leader in fine dining. The average unit volumes are the best in the portfolio. We are building first-class facilities on great real estate sites, largely in stronghold markets of Florida, California, and Texas. Third, Brazil is a category leader and they are seeing a strong recovery in both sales and profits.

New restaurants continue to open above expectations. We are on track to open 16 new Outbacks this year and have a robust pipeline for growth. There are currently 135 locations in Brazil, and we believe we can grow this brand to approximately 240 restaurants over time in this underpenetrated market. And finally, we are working through plans to expand the Carrabba's business in key markets.

Carrabba's has been among our top performers in the portfolio over the last three years. They have built a terrific off-premises business that has opened up a number of possibilities for the brand. More to follow on this opportunity. In summary, Q2 was another solid quarter.

We remain ruthlessly focused on executing against our key initiatives to achieve our 2022 goals while building a great business that will thrive in 2023 and beyond. And with that, I will now turn the call over to Chris, who will provide more detail on Q2 and thoughts for the remainder of 2022.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal second quarter of 2022. Total revenues in Q2 were $1.13 billion, which was up 4.4% from 2021, driven by a $58 million increase in international restaurant sales, primarily in Brazil. U.S.

comparable restaurant sales were down 40 basis points versus 2021. During the quarter, we saw positive trends through May, but experienced softer trends in June, consistent with the industry. Importantly, Q2 sales were up 12% relative to 2019 and maintain an approximate 400-basis-point gap to the industry in both sales and traffic versus 2019. Given stimulus benefits and our outsized comp sales gains in Q2 of 2021, we believe the comparison versus 2019 provides perspective on the progress we have made in growing our sales.

This progress has been bolstered by our significant growth in off-premises dining. At 25% of U.S. sales, Q2 off-premises was down slightly from 26% of sales in Q1. As expected, there continues to be some trade from our curbside business to in-restaurant dining occasions.

Importantly, the highly incremental third-party delivery business continues to grow and was 12% of U.S. revenues in Q2 versus 11.5% in Q1. In terms of concept performance, Outback was 28% of sales and Carrabba's was 33% of sales. Off-premises remains sticky and is a large part of our ongoing success.

It will be a key part of our growth strategy moving forward. Average check was up 7.9% in Q2 versus 2021. This was in line with internal expectations. Q2 menu pricing was relatively consistent with Q1 at 5.8% and the remaining 2.1% was menu mix.

And a final note on Q2 sales. Brazil Q2 comps were up 96% versus 2021. Brazil's second quarter reflected the lapping of COVID-related operating restrictions from last year. Importantly, comp sales were up an impressive 27.6% versus 2019 levels.

As it relates to other aspects of our Q2 financial performance, GAAP diluted loss per share for the quarter was $0.72 versus $0.75 of diluted earnings per share in 2021. The GAAP loss was almost entirely driven by the accounting treatment for the repurchase of our convertible notes. Given the converts were so heavily in the money, the total consideration paid in cash and shares was $246 million. The difference between the total consideration paid and the $125 million principal created an accounting loss of approximately $122 million.

For comparability purposes, this loss has been removed from our adjusted results. Given the potential dilutive effect from future share price appreciation, we are confident that our repurchase of these notes was a prudent economic decision. Adjusted diluted earnings per share was $0.68 versus $0.81 of adjusted diluted earnings per share in 2021. In addition, our Q2 result was nearly double our 2019 adjusted EPS of $0.36 Adjusted operating income margin was 7.8% in Q2 versus 11% in 2021.

As Dave mentioned, Q2 is expected to be our most inflationary quarter of the year. For perspective, commodity inflation was in the high teens in Q2, while labor inflation was nearly 10%. Despite these headwinds, our 5.8% menu pricing in Q2 was not enough to offset the inflation we faced. This did have a significant impact on operating margins in the quarter compared to last year.

We are comfortable, however, with this important decision given that our Q2 margins of 7.8% were 320 basis points above 2019 levels. We continue to benefit from simplified menus and operations, growth in our international business as well as increased average check. And finally, a note on Q2 taxes. Our adjusted tax rate in the quarter was 14%, benefiting from discrete Q2 tax items.

Given the lower rate in Q2, we now expect to be closer to the lower end of our 2022 guidance range of 16.5% to 17.5%. Turning to our capital structure. Total debt was approximately $800 million, and our lease-adjusted leverage ratio was 2.9 times at the end of the second quarter. We are pleased with the progress we have made to improve our balance sheet.

In terms of share repurchases, we have repurchased $62 million of stock through July 28 and have $63 million remaining on our existing authorization. The Board also declared a cash dividend of $0.14. We remain committed to a balanced capital allocation strategy. Turning to 2022 guidance.

We are increasing our 2022 guidance for total revenues to be between $4.4 billion and $4.45 billion. This is up from our prior guidance of $4.35 billion to $4.4 billion. This increase is driven by a few factors. First, we had higher-than-expected revenues in the first half of 2022, both domestically and in Brazil.

Second, we have increased our marketing investment in the back half of the year. And finally, we will take some incremental pricing primarily impacting Q4. We are reaffirming our total year guidance for adjusted EPS and EBITDA. As a reminder, we expect adjusted EPS to be between $2.45 and $2.55 and EBITDA to be between $505 million and $525 million.

We expect the profit benefits from increased revenues to be offset by higher-than-expected inflation. The higher inflation is being seen primarily in commodities, utilities, operating supplies, and R&M. So as it relates to our commodity guidance, we now expect commodity inflation to be between 13% and 14% for the year. This is up from prior guidance of 11% to 13%.

Over the first six months of 2022, we have been trending to the upper end of our original guidance range and have seen more persistent inflation in some of our less locked commodity basket, including seafood, dairy, and freight. We are now 89% locked on our commodity basket for the year. In addition, the repurchase of the convertible notes has required us to make guidance changes to GAAP EPS and GAAP tax rate for the year. GAAP diluted EPS is now expected to be between $1.11 and $1.22.

This is down from prior guidance of $2.23 to $2.32. The entire change to the GAAP diluted EPS guidance is driven by the accounting loss on the retirement of our convertible notes. As it relates to tax rate, the accounting loss on the convert is nondeductible for tax purposes, and we now expect our GAAP tax rate to be between 28% and 29%. As I indicated earlier, our adjusted tax rate is unchanged.

In terms of share count, weighted average adjusted diluted shares are now expected to be approximately 93 million shares. This is down from prior guidance of approximately 95 million shares. The difference in the share count is primarily driven by changes in our share price as it relates to the value of the convert. As it relates to future impacts from the convert, our adjusted diluted share count always captures the full potential share dilution from the convert based on where our stock trades over the course of the quarter.

In our 8-K furnished to the SEC this morning, we have provided a grid outlining how to think about future share dilution at stock prices differing than what is embedded in our guidance for the remaining $105 million principal balance. We will continue to evaluate the right time to potentially repurchase additional amounts of the convert. Finally, capex is expected to be between $200 million to $210 million. We have seen some supply chain and construction delays that may push some of our scheduled projects into 2023.

We should still finish the year around 30 new units in total. Now turning to third-quarter guidance. We expect Q3 revenues to be between $1.05 billion and $1.07 billion, and we expect adjusted EPS to be between $0.31 and $0.36. This guidance reflects a continuation of strong performance in both the U.S.

and in Brazil. For perspective, our adjusted EPS in Q3 of 2019 was $0.10. In summary, this was another successful quarter for Bloomin' Brands, and we are well on our way to becoming a better, stronger operations-focused company. And with that, we'll open up the call for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question is from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein -- Barclays -- Analyst

Great. Two questions. The first one just on your guidance for the rest of the year. I understand that inflation is pressuring the earnings.

Just wondering why raise the revenue guidance into what seems to be a slowing macro? You mentioned a softening in June. Just wondering your confidence in sustaining the revenue momentum despite that slowdown and whether or not you'd comment on July that would be great. So specifically just around the revenue guidance raise into a slowing macro. And then I had one follow-up.

David Deno -- Chief Executive Officer

Sure. I will answer it briefly and then turn it over to Chris on any specifics. But on the revenue side, the first half was very good for us. Brazil has been very good.

And in July, we've seen a sequential improvement in trends. So when you bake that in and look at what the balance of the year looks like, Jeff, those are the factors that are causing our revenue guidance to go up, which we're very pleased about.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. And just to give a little additional color, Jeff. So we raised our revenue guidance by $50 million. So if you think about half of that increase is based on the sales over delivery through the first 6 months of the year.

Some of this is in the U.S. But as Dave mentioned, the sizable portion of that is based on the over-delivery in Brazil. Now moving forward, when you look at the back half of the year, the remainder of the upside is driven by additional marketing investment and the benefits from incremental pricing that we would take in the back half of the year. Now we haven't built all of the benefits from these initiatives into my guidance because there's still some macro uncertainty out there.

But between the marketing and the pricing that makes up the other $25 million. But in terms of why raise it, think about it this way. The full-year comp guide that we're implying in the back half, both in Q3 and then maybe a little slightly higher in Q4 is basically flat same-store sales in Q3 and then maybe a little bit better than flat in Q4.

Jeffrey Bernstein -- Barclays -- Analyst

Understood. And then the follow-up just on inflation. Some of your peers have actually tempered their inflation guidance, some going as far as call on the top on inflation. Just looking to get your thoughts whether you would agree or whether you expect further accelerating commodity inflation? Maybe you could just share what your first half basket was and what your second half assumption is for your commodity basket there? And any color you can provide in terms of that inflation and maybe what it looks like as we look into '23?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. Yes. Sure. So look, I think the first half was in the high teens in terms of commodity inflation.

The third quarter is probably going to be mid-teens or so. And then Q4 is going to be probably low double digits, 10% to 12%, somewhere in that range. And I think that the dynamic of that has more to do with what we're lapping from a year ago. Because if you recall, again, when it comes to our inflation last year, in the first half of the year, and in Q2, for example, we were deflationary in our commodity basket.

And then that started to tick up as the year progressed. So we're going to get some benefit from the lap. Now as it relates to just how our commodities are performing this year, look, there's no question. Our commodity inflation is higher than what we were thinking when we started the year.

If you look at the back half, although there's pockets where I think we're seeing some good news in areas like beef, fuel prices and then some smaller commodities like chicken wings and things like that, we haven't seen a whole lot of upside find its way into our numbers thus far. There are still labor shortages. There's record high demands. So it's putting some pressure on some categories where, I think, you may see some difference between us and maybe some of the other folks is just our -- the way we buy our beef, for example.

We're pretty much locked in on beef. In fact, we have probably more upside in beef in the back half of the year than we do in some of the other categories. We're 90% locked now at this point on our overall basket so there just isn't going to be as much variability when you're not buying spot on a large portion of your overall buy, if that makes sense?

Operator

Our next question is from Sharon Zackfia with William Blair.

Sharon Zackfia -- William Blair and Company -- Analyst

I guess the question first on the value proposition side, recognizing you've been very diligent about kind of keeping price well below inflation. Can you talk about the planned price increase for the second half and the magnitude of that? And also, combined with that, the marketing plans for the second half maybe contrast versus the first half or relative to 2019 and give us a flavor of what kind of marketing we'll be expecting? Will it be more price-focused or brand building? Any context there would be helpful.

David Deno -- Chief Executive Officer

Sure. We'll -- those are kind of two questions. So we'll start with the first one on pricing. I'll kick it off, then turn over to Chris, and then we'll come back to the marketing side.

But, Sharon, as you know, we've been following our company for a long time. What we try and do is have productivity plus pricing offset inflation. Now this year, the inflation was very high. So we haven't priced all the way to inflation.

And although -- and our productivity efforts remain strong, but we will continue to price below inflation to make sure we keep that value equation going. Is there some price in the back half of the year? Yes. But we will price below inflation probably to keep our value equation going. Chris, I'll turn it over to you for any other comments on the inflation side.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Well, yes, just to give context around the menu pricing. So given the inflation, as Dave mentioned, came in higher than expected, we did -- we took some additional pricing this year. We were basically at 5.8% pricing in Q1 and in Q2. So that didn't change.

As it looks to -- when I inferred that we might be taking more pricing in the back half of the year, I think if you broke apart our guidance, we're effectively assuming about 2% incremental menu price increase, either late in Q3 or in early Q4. And that would put us more or less in that 6.5% menu pricing range in the back half of the year. And so we still feel like relative to what we're seeing out there, that provides a pretty good value. And to Dave's point, it doesn't come close to kind of the inflationary pressures that we're seeing so far.

David Deno -- Chief Executive Officer

And we have a lot -- as you know, we have a lot of productivity initiatives also helping us on the margin side. Now let me turn to your marketing question. We have upticked our marketing spend, and we will uptick it the balance of the year, nowhere near 2019 levels. We learn, and also we learned a lot about marketing and how we go to market through digital, through cable, etc.

And that mix is really heavily digital. And Sharon, we're not going to participate in deep discounting in our categories. Our categories generally that we compete in, generally don't have deep discount associated with them. We'll watch that, but our plans are not to do that.

And if you look at our menus themselves, because we haven't taken a lot of pricing, there's still a lot of value on our menus. Let me talk about a couple of places, especially. At Outback and our combo meals, you take a look at what we offer there, some really great products at a great price. And then, secondly, in our family bundles offerings at Carrabba's and Bonefish, a family can feed a family of four for a great price with great food.

So we'll continue to talk about our value. We're not going to plan on any kind of deep discounting. We will have an uptick in marketing spend in the balance of the year, but not to the extent that we saw in 2019.

Operator

Our next question is from Alex Slagle with Jefferies.

Alex Slagle -- Jefferies -- Analyst

Just wanted to revisit some of the drivers behind the previous operating margin goals and the bridge is some of those inputs have moved around a bit with the higher inflation, Brazil, continue to be stronger and then the pricing, and I'm not sure what other dynamics to consider. I'm just curious what's changed in that? And how do you lay that out now based on how things have evolved?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. Sure. So look, as Dave said in the prepared remarks, we are committed to building back to that long-term operating margin target of 8%. And the reality is, based on the guidance we provided, we should have pretty strong operating margin this year despite record inflation.

And the best part is that we don't have to rely on pricing, as Dave indicated, as the only lever to mitigate the pressures. Because as you start to move forward and looking past 2022, and you think about the framework that we provided, I think the biggest change in that overall operating margin framework we provided is really some of this technology-enabled investment that we're going to start seeding into the P&L. And so we remain confident that given some of the things that we've talked about, that technology-enabled productivity that, again, it's going to be deployed over the back half of this year and into next year as well as what hopefully will -- certainly, we would hope it would be a more moderated commodity environment in 2023 that you can build back to the long-term margin target of 8%. That certainly is the goal.

We're not here to provide guidance for 2023 at this point. But certainly, that's in our thinking as we start to think about next year. So in addition, if you think about the levers, right, the other levers. And these are just some of the things that I could point out.

Building back in-restaurant dining is the best solution to driving higher margins, and we still have work to do there. we're confident that with some of these things that we're putting in place that we're going to get there. Having a strong off-premises business that catering, which has a very attractive margin, is a growth lever. Digital opportunities with higher ROIs, a growth lever.

Sales opportunities in Brazil, another lever that can help improve margins. You added things like loyalty programs. So look, there's a lot of variables. And clearly, coming into this year, who would have thought the inflation was going to look like it did.

So there's a lot of variables that can change, but we are committed to achieving this 8% operating margin target, and we think we have the levers moving forward that we can do that.

David Deno -- Chief Executive Officer

And just stepping back a little bit, that's over 300 basis points higher than we were in 2019. And it's a great team and by us company, and we'll continue to see that. And so the big change in operating margin has been a big -- and cash flow has been a big part of what we've been able to achieve in the last few years.

Alex Slagle -- Jefferies -- Analyst

Got it. It's helpful. And just on beef on a follow-up. I mean you were locked so perhaps maybe that if you were floating, that could have been a bit of a temporary tailwind in the quarter.

But just interested in your view, looking forward, how best to manage that exposure as beef could be one protein that stays a bit more elevated in the future?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. Sure. So you're right. The markets -- the spot markets have definitely come down and that does represent -- if we're running in the spot market, that would represent an opportunity for us.

But look, I think that we have a strategy where we go into every year, supply assurance and price assurance means a lot to us, right? And so that's just a different way to approach it. No way is necessarily better than the other. It's just our approach. And so what I would tell you is, as you think about beef, though, we have great beef partners.

And we do have optionality sometimes with these contracts that we put together where we could take part in some upside if there is some upside. So when I talk about potentially beef getting a little better, there is some opportunity for us to get a little better in our overall beef number this year in 2022. It's just not going to be as beneficial for example, in the second quarter or maybe early in the third quarter if we were in the spot market, if that helps?

Operator

Our next question is from Lauren Silberman with Credit Suisse.

Lauren Silberman -- Credit Suisse -- Analyst

I wanted to ask about what you're seeing with customer behavior. As you look across the brands, what are you seeing with respect to changes in customer behavior, trade down, tech management? Are you seeing any differences in trends across channels, any color there?

David Deno -- Chief Executive Officer

Yes. It's been good to see for us. And as Chris talked about in the prepared remarks, we did continue to see a positive menu mix benefit in Q2, and that's continued into July. So we don't see consumers managing their checks at this point.

In fact, in some of our brands, we're seeing continued trade up, and so that's been really strong for us. And so that's one of the reasons why we want to continue to invest behind the marketing and talk about our value and some of the other things we can trade up to in our business that we're seeing. So the consumer, for us, is hanging in there.

Lauren Silberman -- Credit Suisse -- Analyst

Great. And as you look at the slowdown in June across the industry, it sounds like July turns have improved, how much do you think it has to do with sort of broader macro compares relative to normalized seasonality?

David Deno -- Chief Executive Officer

I'll start with that and then Chris can talk about some of the seasonality. But we look at the macro trend. It's a more challenging environment, but the most important thing we stressed in our company is what we do, OK? And the things that we do in operations and marketing and food. And one thing I also want to mention, which I didn't talk about earlier, is our off-premises business continues to have some good legs to it, and there's some good consumer trends there as well.

So obviously, we're dealing in a more challenging macro environment, but we try and stress the things that we do as we go forward. And Chris, I'll turn it over you for any other color.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. I'll give you a little context on the seasonality thought. I think this year, we're much closer to seeing traditional seasonality than you were last year with the stimulus and the COVID fluctuations. In fact, if you look at the way we kind of construct our guidance, we use 2018, 2019 as more of a guide for the shape of how our traffic patterns might come in.

And so what does that mean for a quarter like Q3? Excluding holidays, you go back to June. June and July are pretty similar in terms of traffic pattern and flow the way they come into the P&L. So the fact that we did see that acceleration between June and July is pretty encouraging. And then, traditionally, volumes would tick up a little bit in August.

And then, of course, they come back down again in September after kids go back to school. And so we've kind of modeled our thinking along that pattern.

Operator

Our next question is from John Glass with Morgan Stanley.

John Glass -- Morgan Stanley -- Analyst

First, can you just talk about what you're seeing in labor inflation? It seems like, at this point, maybe where -- staffing is probably easier, turnover might be lower I think you're still seeing pressure on that line. Is this driven by some state-mandated minimum wages, perhaps, coming into key states? What -- maybe just a quick what's going on in the labor market for you and how you think about turnover, improving and retention improving, etc.?

David Deno -- Chief Executive Officer

Yes. We are seeing the staffing environment improve. [Inaudible] of time was difficult, although John, you followed our company for a long time, and we got off to a very good start because we retained all of our staff. We didn't have some of the staffing challenges at other companies faced at that time.

But clearly, the marketplace has gotten better. We're seeing that in our metrics and our labor metrics be it retention, be it staffing, turnover, etc. And so the environment is getting better. And I'll turn it over to Chris to talk about any of the economics.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. overall levels of labor inflation were pretty consistent between Q1 and Q2. In fact, Q2 was a teeny tick down from what we had seen in Q1. So that does sort of validate what Dave was saying in terms of just the stability we're seeing.

And then just in terms of just pure math year-over-year, again, to what we saw in cost of goods sold. The back half of 2021, we started to see labor inflation pick up. So just as you start to lap that, you should start to see some relief on that number more of the high single digits and then maybe even mid- to slightly higher single digits in Q4. Q3, sort of higher single digits and then Q4, you get sort of mid- to 5%, 6%, 7%, somewhere in that range.

John Glass -- Morgan Stanley -- Analyst

And, Chris, just for the avoidance of doubt, maybe I missed this, what's the non-GAAP guidance now? Is it simply adding -- is there any other unusual-s or maybe just spell out what is the non-GAAP guidance now for earnings for the year?

Chris Meyer -- Executive Vice President and Chief Financial Officer

The non-GAAP, so the adjusted, it's the $2.45 to the $2.55. And then when you look at GAAP guidance, the entire difference between the GAAP guidance and the non-GAAP guidance has to do with the convertible -- what we did with the convertible by repurchasing it and the loss inherent in them.

Operator

Our next question is from John Ivankoe with J.P. Morgan.

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

Some questions on capital, if I could. Capex was just, I guess, tweaked to $200 million to $210 million on 30 new units in that will be opened in '22. But obviously, there's probably some spillover for units that aren't going to open in '22, but you'll spend on '23. So the question is, what is your new unit capex number in '22? And obviously, what I want to solve for is the non-new unit capex number in '22.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. We'll pull that up real quick here for you. So new units, if you look at 2022, it's about $40 million of capital.

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

On -- you're spending $40 million on new units on $30 million.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. $40 million because a lot of these are Brazil and they're the smaller box units that we're building. So their investment is much, much lower.

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

OK. All right. Fine. And so the remaining number, $160 million, $170 million spent not on new units.

Is that the right run rate? I mean, is that kind of like the necessary repair, maintenance investment, just keeping the brand current? I mean do you think that -- is that the right base to really think about what the longer-term run rate of capital intensity is of the business, excluding new units?

David Deno -- Chief Executive Officer

Yes, John. I'll turn it over to Chris to provide any more details. But don't forget, we've got -- as you've asked since in the past, we've got a big rollout right now with handhelds and the ovens, right? And that's transformational. In fact, I'd love to meet you and maple sometime across the state and see our new out there that --

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

I will be in there two hours, Dave. No problem. We can do it. We can do it tomorrow.

David Deno -- Chief Executive Officer

Yes. That has high volume. It has a new kitchen as new handheld everything in it. So that level of capital spending right now includes that.

So it's a bit elevated on non-new capital. But I'll turn it over to Chris to talk about the rest.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. So maintenance is in that -- I think we've talked about this a little bit before, but maintenance is in that $50 million to $60 million a year range, maybe a little higher this year with inflation, so call it $60 million to $65 million. But the biggest delta this year that you probably won't see to the same degree in future years is that, call it, $65 million to $70 million of IT capital that we're deploying in our restaurants for new technology. So that's probably the biggest toggle.

Look, as the new -- to your point, if you look into the 2023 and beyond, your -- as that IT capital comes down, we would expect our pipeline to grow. So you're going to start to see capital tick up a little bit from where we are here. But again, I don't think you're talking about a $300 million number, John. If we're talking about $200 million this year, it may get as high in the future as $250 million.

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

Yes. And I did -- listen, you're were leading exactly in terms of where I wanted to go. In terms of KDS, in terms of handheld, in terms of the grill, I mean, what is -- how can we kind of circle those numbers in terms of spending for '22 and '23? And when can we start to really talk about benefits from those programs? And Dave, to your point, it's the clamshell grill that I guess, at this point, I'm probably most interested in because I assume would be the biggest, most substantive change for how the business is run in the future versus how it's run in the past.

David Deno -- Chief Executive Officer

Yes. I don't downplay the hand helps, John. We'll see the handhelds in our restaurants at Outback by the end of the year. And you'll see some of that benefit this year, but most of it next year.

And then for the ovens, we'll complete the back half -- we'll complete the back half of 2023. That's a little bit longer than we expected because of some of the supply chain initiatives, but not a lot longer. And those benefits our large, product quality, service times, back-in-the-house labor, all those things are coming together. And I mentioned that restaurant [Inaudible], it's a very high-volume restaurant.

It's got everything in it. And so it's and performing very well. So those are the kind of things you can see from us, John, moving forward. And that will be in our -- we talk about 2023, when we get to that point, we'll talk about some more that's -- some of the financial benefits that come with that.

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

And just so I have it the updated timing on KDS?

David Deno -- Chief Executive Officer

That will be done during 2022 and leasing a bit into '23.

Operator

Our next question is from Jeff Farmer with Gordon Haskett.

Jeff Farmer -- Gordon Haskett Research Advisors -- Analyst

Just wanted to follow up on a couple of things. So first would be July same-store sales. I think you guys pointed to a sequential improvement in trends in July. So I was just curious if you're talking or referring to both the U.S.

and Brazil when you made that comment?

David Deno -- Chief Executive Officer

The U.S. sequentially has gotten stronger. Brazil, I don't have off the top of my head, it's about the same -- the same which has been terrific, by the way. had a great year so far.

Jeff Farmer -- Gordon Haskett Research Advisors -- Analyst

And then just sort of drilling down a little bit further. So July is that versus the 2Q? Or were you referring to June on the sequential improvement?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Versus June. July has improved versus where we were in June.

Jeff Farmer -- Gordon Haskett Research Advisors -- Analyst

OK. Helpful. And then just one last one. So early in the call, you made some third-party delivery margin comments.

So the question is, where do off-premise, meaning both curbside and delivery margins stand relative to in-restaurant margins right now?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Well, curb -- so like we've said, the good part about curbside is as those margins are effectively the same as our in- restaurant margins. So we feel really good about the curbside. And again, that is the largest portion of our overall off- premise mix, right? In terms of third-party margins, they're not as good as in-restaurant margins, but they're still really attractive, right? So as long as -- and the best part is what we've talked about is that because they are incremental sales, and we feel very comfortable saying that these are incremental sales, you get better flow-through on that. You get those seating in your P&L.

You're not trading between an in-restaurant visit where you don't get all the benefits. So again, a little bit lower, but still really good.

Jeff Farmer -- Gordon Haskett Research Advisors -- Analyst

Just last quick follow-up. In terms of thinking about those off from a sales, it's roughly 2.5 times pre-COVID levels. Just as we sit here in the third quarter of '22, what's your updated thinking on the incremental nature and sustainability of those off-premise sales?

David Deno -- Chief Executive Officer

We think they're sustainable. We've got the people, the systems, the processes in place. Clearly, our customer is wanting our products in their homes and either carry out their delivery, and we expect to see that continue to grow in the years ahead. And then, Jeff, one last thing I wanted to mention.

You touched on it, but I want to make sure. Sometimes Brazil doesn't get the attention with investors that it could. And if you look at our same-store sales growth, our margins and our new unit performance is just having a terrific, terrific year down there. And Pierre and team are doing just a great job.

So I wanted to make sure I called that out in our call today.

Operator

Our next question is from Jon Tower with Citi.

Jon Tower -- Citi -- Analyst

Great. Actually, I guess, just hitting on that Brazil topic, I know in past cycles, election cycles that is demand in that market from consumers seems to get a little erratic. So I'm curious with an election coming this fall. Do you guys have any plans to maybe proactively ensure that demand doesn't chop around a little bit.

Are you doing any advertising that could hopefully draw some customers in even if they're a bit distracted by what's happening?

David Deno -- Chief Executive Officer

Yes, John. Yes. Very forward-looking question. Yes, we are -- we have very strong marketing plans in Brazil to deal with the balance of the year.

I don't want to get into what exactly those are, but believe me, we spent a lot of time talking about it, and the team down there is well ahead of it. And we -- that team has been through election cycles in the past and has done a great job, but we are well ahead of that planning.

Jon Tower -- Citi -- Analyst

OK. And then just -- I don't want to beat a dead horse here, but going back to inflation outlook for later this year '23. There are indications that the beef supply in the U.S. will come down pretty significantly year-over-year, likely impacting prices.

So I'm kind of curious to get your thoughts on how you think about securing supply, but also pricing for next year? Does this impact the timing on when you would lock or potentially not lock? I'm just curious what's your thinking around that.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. I don't -- again, though, if you prioritize making sure you have supply assurance, then your variability and your timing is a little less. There may be some kind of negotiations that take a little longer or a little shorter than we normally would. But we typically start those conversations in September, and we probably typically don't lock anything down until the very end of the year.

So I don't foresee that changing. But your points are all correct. I think there is a very fluid market, and it's been -- it's been good now. They've talked about supply for next year.

I think we just keep an eye on all of that, and we'll figure out what the best decision is for the company. But your points are all spot on, and they're all top of mind for us.

Jon Tower -- Citi -- Analyst

Cool. And then just last for me, I'm just curious from a higher level. Obviously, the industry has gone through quite a bit of inflationary pressures. Have you seen any indications in some of your markets where smaller chains or independents have accelerated the pace of closing stores? Or is it still kind of status quo?

Chris Meyer -- Executive Vice President and Chief Financial Officer

No. I don't think we've seen any of that. I mean, I think you are seeing smaller chains and stores get a little more aggressive on the discounting side, but that's about all we've seen.

Operator

Our next question is from Brian Vaccaro with Raymond James.

Brian Vaccaro -- Raymond James -- Analyst

I wanted to circle back on the new equipment package at Outback. Can you just give us a status update on how many have it installed? When you expect to complete the rollout or how many kind of just -- how many by the end of this year and fully rolled? And Dave, you started touching on it a little bit, but can you quantify some of the benefits that you're seeing in terms of order accuracy, throughput, labor savings? Can we ballpark some of those things?

David Deno -- Chief Executive Officer

It's a little too early to ballpark some of those things yet because, by the end of the year -- by the end of the third quarter, we'll have installed about 140. And what we're seeing, though, and I don't want to get into for competitive reasons some of the labor savings and other things. So let me talk proudly about it, but it takes fewer people to work in the back of the house with this new equipment. The order accuracy is much improved.

Again, this is just a start. So we don't -- I don't want to get too far ahead of myself here, Brian, but we're very enthused by the order accuracy. The table turns is faster because the product comes out faster. And then we're seeing, broadly for Outback, improvement in our customer scores.

I talked about in our prepared remarks. If you look at our food scores, our service scores, those things are coming together to really provide some good results. So we'll see -- we'll finish this at the back half of 2023 with our back-of-the-house equipment. The handhelds will be done by the end of the year.

And we'll provide more of an update on that, Brian. We have more demonstrated achievement. We're very optimistic about it, but it's probably a little too early to provide some real specifics. But we are seeing it in back-of-the-house labor and in our customer measures.

Brian Vaccaro -- Raymond James -- Analyst

OK. And I guess on the marketing -- Chris, sorry if I missed it, but what was the marketing spend as a percent of sales in the second quarter? And can you help us ballpark where that spend you plan to take it in the second half, what you've embedded in that guide, just ballpark?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. I think it's probably closer to the 2% of sales range, but I'll have Mark confirm that where we landed in Q2. And what was the other part of your question about the back half, Brian?

Brian Vaccaro -- Raymond James -- Analyst

Yes. Just what you've embedded. You said I think you have plans to increase your marketing spend in the back half of the year. I'm just trying to gauge the level of that investment versus what we've seen in the P&L in the second quarter.

Chris Meyer -- Executive Vice President and Chief Financial Officer

If you look year over year, it's probably between -- in each -- in Q3 and Q4, you're probably up $10 million or so in Q3 and Q4 would be my guess relative to last year.

Brian Vaccaro -- Raymond James -- Analyst

$10 million in each quarter, roughly?

Chris Meyer -- Executive Vice President and Chief Financial Officer

Correct. Yes. And I was -- Mr. Graff is telling me that I was spot on, on the 2% of sales in Q2.

Brian Vaccaro -- Raymond James -- Analyst

All right. All right. Well done on that. And then last one, just to clarify the July commentary.

Is that a one-year comment versus '19, if that's relevant? And then in the spirit of trying to just level set where we are, would you be willing to quantify July versus June? That's all I had.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. So it is a one year. And importantly, before I forget the point is that we -- if you go back, and again, we talked about the value of three-year comps. That three-year same-store sales number has been pretty consistent irrespective of kind of the time period, a little bit of a dip in June, but we've been consistently in that kind of double-digit same-store sales number on a three-year basis.

Not going to get too specific in terms of June or July trends. Definitely, though, if you -- and look, let's be clear, they're both dipped negative, which would make sense given kind of where our comps landed in Q2. But there's definitely an improvement between June and July, which is pretty encouraging because it wasn't just an improvement in the -- beginning of July, just -- we've seen slow, steady improvement as July has progressed, and that's pretty encouraging.

Operator

Our next question is from Jared Garber with Goldman Sachs.

Jared Garber -- Goldman Sachs -- Analyst

Great. I wanted to actually swing back to the marketing that you just discussed a little bit. It looks like if we flow in sort of that $10 million a quarter over the next couple of quarters, looks like you're pushing up maybe 2.5% or a little bit higher than that by the end of the year. I think the pre-COVID level is around 3%.

I know you guys are targeting to be below that. How should we be thinking about the level of marketing spend as it relates to sales going into '23? Is it fair to assume that, that 2.5%, maybe a little bit higher than that sustains going forward? And then just as it relates to the marketing specifically, can you help us understand how you expect to see that manifest maybe with a slowing consumer backdrop and how you expect to maybe leverage value messaging or broader brand-building messaging within that marketing plan?

David Deno -- Chief Executive Officer

Yes. We -- as I mentioned earlier, with our -- if you look at just our menu offerings at Outback in particular, the combos that we have and some of the other values that we have are very compelling, especially when you line them up with other players in the industry, and we're going to talk about that. And the thing that we have about marketing is, we've learned so much on digital we can have tremendous flexibility. We can toggle it up or down depending on the returns that we're seeing.

So the investments there, we have a very good understanding what those returns look like. We have a very good understanding of what we're going to be marketing. We're not going to be doing deep discounting, but we will be looking at some of our menu items at Outback that offer a very good value versus some of the competition. So that's where we're going to be spending our money.

And like I said, we have an excellent understanding of the returns, and we have an excellent understanding of the ability to flex up or down depending on what we're seeing.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Yes. So marketing in 2019 was 3.5% of sales. And so when we laid out our long-term margin framework, we said, "Hey, you know what, we're not going to spend to that. It's probably going to be at levels approaching 3%.

" well, look, I think that as we've learned and we've gotten better at this, I think that we feel like this 2% to 2.5% of sales range is a pretty good range. It makes sense. It was 2% in Q2. To your point, it may tick up a little bit as a percentage of sales, Q3, Q4, but it feels like that's a pretty decent proxy.

And look, we reserve the right to change our mind on this, but 2% to 2.5% of sales feels pretty good.

David Deno -- Chief Executive Officer

And as we look at the consumer environment, we get real-time information every day and how we're doing, and we can move that up or down depending on what we're seeing with the consumer and what we're seeing with competition. So I'm very pleased with the flexibility we have on this and the returns that we're getting in our marketing space.

Jared Garber -- Goldman Sachs -- Analyst

Just one follow-up for me. On the Outback traffic line, it looks like traffic versus '19 down about 4.5% and average check is up 14.5% versus in the same time period. I know you mentioned the consumer is still sort of trading up in that mix benefit in the quarter. But can you just help maybe contextualize maybe what you're seeing versus 2019? Is there anything that would suggest that the consumer is bulking, so to speak, for lack of a better term, that some of the increases over time as we see that traffic trend dip lower?

David Deno -- Chief Executive Officer

No. We are not seeing the consumer bulk. And I want to remind the investors that we changed our marketing profile quite a bit at Outback versus 2019 as far as the level of discounting and marketing expense. So if you look at that traffic piece, please keep that in mind.

We talked about changing how we work going forward at Outback. But, no, the traffic trends and the trends we're seeing at Outback, like we're seeing sequential improvement, and we're seeing the benefits of some of our marketing. I'll turn it over to Chris the rest of that.

Chris Meyer -- Executive Vice President and Chief Financial Officer

Well, just to emphasize that point and add a little more context. I mean, choosing not to replicate that activity does remove a significant portion of traffic from our base that was incentivized by discounted offers. And also, keep in mind, Outback, traffic relative to '19, was still ahead of black box or whatever measure you want to use by over 200 basis points, and that's traffic, right? So -- and now we're making additional marketing investments in Outback that will help drive traffic. So they carry a higher ROI.

We've talked about this. So, look, the environment continues to change and remain dynamic, but we're going to continue to maintain our strategy of keeping those deep discounts that we had back in '19 out of the brand.

Operator

Our next question is from Brian Mullan with Deutsche Bank.

Brian Mullan -- Deutsche Bank -- Analyst

Just a question on development. As it stands today, what do you think is a reasonable way to think about net unit growth in the U.S. next year? Just wondering if 3% is something that could be in the cards? Or if not, like how long might it take to build up to that 3% growth rate on a net basis? And then just related to that, outside of equipment delays, is there any scenario where you would put a pause on this due to macro? Or are you pretty committed to the development regardless of the environment?

David Deno -- Chief Executive Officer

No. In my answer to the second question first. In my career, some of the best move that we made in companies I've been involved is when the economy is a little tough. You can really make headwind on sites, maybe saving some cost, etc.

On a net basis, we aren't going to get into 2023 guidance or 2024 guidance at this point. But 2% to 3% growth on a net basis, I do know, and we'll provide more context on that as the year goes along and into next year. So -- and we want to continue to build that in the years ahead. But I can tell you looking at the pipeline that our real estate team is developing, especially at Outback, we're seeing some really great sites in the right trade areas, in the right parts of the country with really good returns, and that pipeline is growing.

So I would anticipate that, that 2% to 3% I'm talking about on a net basis continues to expand in the years ahead. But it's a little premature to go beyond that, but we'll talk about that more in future calls. But you're going to see our pipeline move up, and that's one of the reasons why we ask Mark Graff to move over to that part of the world and make it happen because he is going to make that happen for us, along with the team.

Brian Mullan -- Deutsche Bank -- Analyst

OK. And as a follow-up, last call, you mentioned converting to a new Dine Rewards program that's points based. Just wondering if you could elaborate on that a little bit, exactly what was changed with the program? How is that going so far for the consumer? Maybe you can just talk about the benefits you expect to see over time as a result of that change.

David Deno -- Chief Executive Officer

Yes. We went to -- from a business base program to a points-based program, which offers us a lot more flexibility, gets to work to our customers a lot faster. We're seeing an uptick in the sign-ups. And this is just the start.

We can look at more marketing programs. I think the benefits for the company and to the consumer, both -- it's the magic of the and are both coming together. It's not quite as costly for us, but the consumer gets rewarded more quickly. And there's partnership opportunities here that we're going to take advantage of.

So I think we're going to see greater sign up, we're going to see greater marketing. And then once people sign up, they're going to use it more and more and more. And then we get all that information to market to our customers, which is still valuable. So this -- we are very excited about the future of our Diamond works program and what it offers.

Brian Mullan -- Deutsche Bank -- Analyst

OK. Is that fully complete the transition, just for clarification?

Jon Tower -- Citi -- Analyst

Transition is done.

Operator

We have reached the end of the question-and-answer session. And I will now turn the call over to Dave Deno for closing remarks.

David Deno -- Chief Executive Officer

Well, thank you, everybody, and thank you for your interest in our company. We look forward to talking to you some more at the conclusion of Q3 in October.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Mark Graff -- Group Vice President of Investor Relations

David Deno -- Chief Executive Officer

Chris Meyer -- Executive Vice President and Chief Financial Officer

Jeffrey Bernstein -- Barclays -- Analyst

Sharon Zackfia -- William Blair and Company -- Analyst

Alex Slagle -- Jefferies -- Analyst

Lauren Silberman -- Credit Suisse -- Analyst

John Glass -- Morgan Stanley -- Analyst

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

Jeff Farmer -- Gordon Haskett Research Advisors -- Analyst

Jon Tower -- Citi -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

Jared Garber -- Goldman Sachs -- Analyst

Brian Mullan -- Deutsche Bank -- Analyst

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