Dine Brands Global Inc (DIN) 2002 Q1 法說會逐字稿

Good day, ladies and gentleman and welcome to Applebee's first quarter 2002 earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. With that I would now like to introduce your host for today's conference, Ms. Carol DiRaimo, Director of Investor Relations. Ms. DiRaimo, you may begin.

Good morning and thank you for joining Applebee's first quarter 2002 earnings conference call. This call is being broadcasted simultaneously over the Internet. A couple of calendar items to note. Comparable sales for the April fiscal period will be released next week and a reminder that our upcoming analyst conference will be held on Wednesday, May 15th in New York and Thursday, May 16th in Boston. If you have not yet responded please contact me. The conferences will be web cast. Second quarter 2002 earnings is scheduled to be released on Wednesday, July 31st after the market closes and our quarterly conference call will be on Thursday morning, August the 1st at 10:00 a.m. Central Time. As we continue with our remarks today, many of the statements we adopt to make with respect to our business outlook including comparable sales increases, costs, earnings per share growth and the restaurant development are forward-looking and based on current expectation. There are several risks and uncertainties that could cause actual results to differ materially from those described, including but not limited to the ability of the company and our franchisees to open and operate additional restaurants profitably, the continued growth of our franchisees and our ability to attract and retain qualified franchisees, the impact of intense competition in the casual dining segment of the restaurant industry, and our ability to control restaurant operating costs which are impacted by market changes, minimum wage and other employment laws, food costs and inflation. You should review our Form 8-K filed with the SEC on February 13th for important information about factors that can contain actual results or events to be materially different. Now, I will turn the call over to Lloyd Hill

Thanks Carol and good morning everyone. With me in addition to Carol, are George Shadid, our Chief Operating Officer and Steven Lumpkin, our Chief Financial Officer. As you may recall, in our last conference those new rolls for George and Steve came effective just this past March 1st. I think I could comment on the status so that transition in order and the end of is done, complete. I am really pleased to tell you that both Steve and George are fully functioning in their new roles and moving us forward. This morning, I would like to make just some brief comments covering the following areas, a few comments on our first quarter results, a few on our sales trends, and then our updated earnings guidance.

Now, first is to our bottom line results, as you saw in the press release, diluted EPS increased 18%, the $0.53 as compared to $0.45 last year, $0.02 ahead of consensus. I am also pleased to tell you that our net income increased 21%. And Steve will cover more details on earnings picture for Q1 later in the call. Our return on equity was over 24% remaining one of the highest levels in the industry. And lastly, we repurchased 250,000 shares in the quarter at an average price of $33.30 for a total of $8.3m. We have, we have remaining $12.3m under our current authorization and since 1997 we have repurchased nearly over stock. Now, as to sales trend, in light of what many call the continued uncertainty in the economy and a shift in the Easter, we are really pleased that system-wide comp sales exceeded our expectation.

As you know, system-wide comp sales increased 3.5% for the system and that includes an exceptional component of 4.1% for our franchise restaurants. Company restaurants increased 1.5%. And as it is to the speak of weather in March, the fact is that five of our 11 company markets had some negative impact from particularly ice in March. I think it is also worth noting again for you that since last June when our franchisees ruled out the new core menu, our franchise comp sales have succeeded company's sales. I stated at that time, George stated at that time, many of our franchisees took the opportunity to take price increases while we have not done so in our company markets. Also worth noting that in the 300 plus company restaurants, those restaurants are concentrated in 11 markets while our 1100 franchise restaurants are spread across the country. I am also going to point out that David Goebel continues to do, I think extraordinary job and his franchise team in their focus on improving operations at the franchisee level. Now, in general, I think our solid sales performance in the first quarter reflects the success of state.

Our two state promotions somewhat offset by the timing of the Easter holiday, which cost our March result to be somewhat skewed. Balancing out the holiday timing, though we expect our April comp sales those results to be an excess of 3%. And as Carol mentioned, we will release actual sales information for the April period next week. Well it certainly appears that casual dining, in general, Applebee's specifically continued to perform well during this uncertain economic period. And I think that it reaffirms that the March segment is the place to be. People are still leaving out, our of strong place value convenience had been an asset in this prominence. I think they continue to be an asset as we move into the future. So based on the strong sales performance so far this year and the investment that we are making in our people strategies, we now expect system-wide comparable sales for the remainder of the year to increase by at least 2%. As a result, we are now raising our expectations on the full-year diluted earnings per share to be in the range of $2.11 to $2.15 up 17-19% consistent with our growth expectation. So in closing of my remarks we ended the quarter with over 1400 restaurants system-wide that is more than our next two competitors combined.

We believe that this dominant market position along with demographic and lifestyle trends, the continued food and menu initiatives, our marketing strategies and our marketing club and our franchise business model are going to continue to provide a solid foundation for future growth. So we look forward to seeing you and discussing growth strategies at our upcoming conferences particularly next month. So with those remarks I will turn it over to our Chief Operating Officer, George Shadid. George.

Thanks Lloyd. During our last conference at the beginning of the year, we indicated that our operating opportunities and our focus for 2002 exist in only four main areas. One, continuing to strengthen the brand image with media and the concentration of our message to increase the effectiveness of our execution at the unit level in the execution of food and the delivery of service. To continue strong retention of quality management staff and importantly improve our food positioning. So today, we will take a quick look at what has been happening over the last quarter in each of these key areas.

First, our brand image. Marketing and advertising lines, we continue to evolve and strengthen our advertising message. We continue to use a tag during the neighborhood, which was introduced in a very strong campaign last year. You will note in our recent commercials for the rest of this year were evolving from the theme that we have used in the campaign last year for retaining the equity that was established in the neighborhood tag line. There are two approaches in our commercials by this year, on the one hand commercials that showcase the brand image of Applebee's and secondly we will continue to feature our food and value proposition that highlighted in campaign commercials. On the image front, you may have seen our new commercial that was introduced during the world Olympics in the first quarter and continued through the MCAA tournament. This was a new approach for our concept to establishing early the brand persona of Applebee in the eyes of the customer. Positioned Applebee's Neighborhood Grill and Bar as an integral part of each restaurants and neighborhood and we have a great feedback from our guests at all levels and a lot of identifications by our guests with that particular message in their own market. Our guests have responded with sales that you saw in the first quarter results. We will continue to have additional commercials with this theme approach and image approach later this year. It will also continue to utilize our network advertising strength to convey Applebee's food and menu message along with our commercial campaign. I that regard, our next campaign begins next week and it will be bringing back our popular "honey of a deal" campaign that we introduced in the fourth quarter of last year. This particular message did extremely well in the fourth quarter given the challenging operating environment in the post of 09/11/01 economic environment that we had.

We are very pleased with the equity that was built in this new line of products in the overall campaign promotion by bringing it back and it will convey not only an improved food message with the offering but a very strong value message. You will see new creative commercials beginning next week to accompany the seven-week campaign. We will have the full strength of our network media program behind the promotion.

Now on the network media, we commented earlier that we continue to leverage the national and network media as the size of our system grows. Advertising increasing again this year and not only in proportion to the sales base but even more so.

When we combine the favorable advertising rates of this year in our upfront media purchase last year we are seeing our buying power in terms of real advertising rates to be increasing by about 20% this year about double system-wide sales growth. increasing our advertising as a percentage of revenue. So we look ahead to Q2 through Q4 this year, you will see significant network advertising presence behind all of our promotions, at levels significantly higher than the last year. This will really enhance our ability to get our message across and as we continue to work on execution and food, we think we have the right formula.

Our second opportunity area - execution. With the restaurant level across our entire system of 1400 plus location, we are focusing even more than in the past on consistent execution. With our size and our large customer base consistency we become even more strategic comparative. We must drive consistently against experience each and every time they visit any of the Applebee's and we have to enhance the experience to a higher level of service in quality food delivery.

Now I guess that satisfaction scores continues to improve in the first quarter as we system-wise focus on driving improvements. We are announcing the results especially in the arenas of the food delivery, the speed of food delivery, and attended service. We major our effectiveness by our customer satisfaction index, which is the methodology that gathers over 40,000 guest responses each month, and in our company restaurants alone, we get between 10,000 to 12,000 responses. So, it is very timely and broad reaching feedback system, we have a high confidence level i.e., that this information is in timely touch with our guest experience and it is also one of our major strategic focuses. We are now at all time high on customer satisfaction scores that continue to increase throughout the quarter. The company direct over a 300 really system-wide for that matter, this increased level of execution is being driven in significant part by our recent success in the people arena. Next, our third area of opportunity that I spoke of - strong retention of our management staff. During the quarter, we continued at the company level to deliver additional resources to our people strategy through a combination of higher management staffing levels, increased incentive comps, and retention programs.

While these programs have had a near-term impact on our restaurant margins, we believe these investments are designed and will deliver improved execution resulting in higher guest satisfaction and ultimately the goal of even stronger sales growth and traffic over the longer-term period. Our focus starts with the higher staffing levels of management and narrowing and we have to develop a lot of attention staying . When you take these efforts combined with the easing of the restaurant management arena, our staffing levels for the management are the highest we have seen in years. I think I can say now that we are in effect for the first time fully staffed at the restaurant management level, in fact, we are hiring some extra managers in advance of new openings later this year. In company restaurants, we are currently staffed with the equivalent of additional one-fourth manager across all restaurants vs. the first quarter of last year.

With this additional management staffing level and the quality of management, it gives us the ability to really impact quality execution service and results and again to that consistent performance in execution continuity of management is the key. We continued our focus on retention as opposed just to the conventional turnover. We are showing significant improvement in retaining our top 20 percent performers. Those in the high group of performers are the ones that we especially want to keep on continuity and are having great progress there. Conventional turnover is around 20% for all managers, which is very low and we are very pleased with. Our incentive comp program for management now rewards our restaurant managers directly for the improvement in customer satisfaction scores. There is a direct link between increasing execution and immediately rewarding that. Now this is resolved at an increased payout over the last six months and is in essence part of that investment for the future, which we know, will payoff.

So, in summary, we are well staffed with higher quality and higher quantity managers and all the employees than we have ever been. We have a great foundation for continuity and really a great foundation to take advantage of our excess capacity that exists in our restaurant. If we can increase our sales volume not average volume over time, we are willing to go on a higher sales trend, and we believe we have the foundation of quality and quantity in staff and management to do that.

Lastly, on the food front, there is a strategic objective of increasing the quality and appeal of our food and menu offerings. Our promotions in the first quarter were two steak promotions, first the steak scale up that ended in early March and we were completing just this week our second length Steak Stampede. Important strategic foundation of these campaigns is not only the quality but the value that are offered. We offered a combination of a 11 oz sirloin steak price points between 9.99 and 10.99 in most markets and we again featured a 20 oz Porterhouse steak for 14.99, all of which when looking at the competitive environment is a very strong value offering. It has great equity build with our customers. Earlier I commented on the reintroduction or the second introduction of our Honey of our deal promotion that is back after last fall. This has a great line of the products steak sale in riblets and chicken all with the honey-flavored sauce again not only value and the total of the promotion but in the actual price in value, 8.99 to 10.99 in most markets for the items.

Lastly, on the food front, a continuum of our whole menu. That is the introduction I updated at the end of this month. We will be introducing a new menu that has new graphics and new look and feel, new overall dimensions to it not only on look but additional new items and improved items. There are 10 new and improved items on the menu including new features such as shrimp , a low fat white fish with mango . the the 20 oz. Porterhouse and the strong Honey of a Deal line up, which has great consumer equity bill. We also have a number of items that have improved as far as quantity and quality and presentation. One last initiative that revolves around our food is the To-Go initiative. As we discussed briefly in our last call, we are currently testing a number of alternatives on To-Go. We are looking at all the best practices from what has evolved in the segment over the last couple of years. We are testing and evaluating the positioning, the advertising, the food and service, and importantly how we deliver in package To-Go products. We are in a number of markets with significant tests, we are in the latter stages of much of this testing and we are also looking at how to meaningfully utilize our size and scale with advertising and media support.

It is important that you consider that we are the largest casual dining player. When we go down the path of To-Go we have the leverage of this size and the power of our franchise system to provide for the program. Without a concentrated program we are already at around 4% mix in To-Go and this presents a great opportunity to take advantage of the learning that the industry has demonstrated over the last couple of years. We will talk more about that in a few weeks at our conference.

So in closing, on the forefronts of our focus: brand image, we had increased levels of national media, new created commercials and successful brand building tool. Execution is in the highest level we have seen, high customer satisfaction scores and a particular emphasis on consistency in execution. Our retention of quality management staff is at an all-time high, we are fully staffed and the foundation of people to deliver continued sales improvement and taking advantage of our capacity availability. And lastly, food, new menu coming down the pipe with new exciting items and improved offerings and new graphics. So our team is passionate about our associates, our guests, and we are getting results. we just had our annual general managers' meeting in March for general managers and I haven't seen a higher level of excitement, commitment, and talent in any of the last ten years. Our company and franchise operators alike are looking forward in to the future and to build Applebee's as not only the largest casual dining company in the world but the best in terms of price values, and service, and overall positioning in the overall customer proposition. Steve I will turn it over to you now.

Thank George. Great comments. Good morning everybody and thanks again for joining us. Let us take a quick look at our overall results and hit some highlights in the and then I will end with some comments on our increased expectations for the full year. Now as the company's sales, the company's sales were up 9.3 percent overall to 175 million dollars and that was driven by comps of 1.5 percent and by four new openings on the company side and that will put us two openings ahead of last year. That is a 9 percent increase in unit capacity on the company side quarter to quarter. Franchise income up 11.7 percent, nearly 25 million dollars in the quarter, that is driven by those strong franchise talked about, a 4.1 percent in 9 new franchise openings during the quarter, and that is an 8 percent increase in unit capacity on the franchise side. Total revenues up 9.6 percent, nearly 200 million dollars for the quarter and our system wide revenue base for the quarter comes at nearly 800 million dollars and it is on track to substantially exceed 3 billion dollars for the full year. System wide revenues up 11.5 percent driven by those strong comps of 3.5 and those 13 total openings. Net income came in at 20.3 million dollars, up 21 percent over the last year Lloyd talked about. This performance does include the impact of adoption or change in accounting for goodwill and that effect was 1.3 million dollars. When you exclude that our net income was up a solid 15 percent without the benefit of that goodwill in the quarter. As to diluted EPS, as Lloyd mentioned we earned 53 cents per share versus 45 last year, that's up 18 percent and then when you take out the impact of goodwill EPS is up 13 percent for the quarter.

A couple of quick highlights on the P&L. As we move down the page, we are very pleased with our food cost performance. Food cost came in at 27.1 percent for the quarter, it was up a tenth over last year. As George discussed, even though we ran two state promotions and like many our categories saw some pressure at the produce line, both of which drove our food cost. We continue to benefit from our supply chain initiatives and the focus is on managing waste. attempts were really commendable here quarter over quarter. Labor, overall labor came in at 32.8 percent that's up a 100 basis points versus prior year and let us take a quick look here at hourly labor, we are very pleased of managing that, hourly labor is basically flat. QoverQ percent of sales, we are seeing some hourly wage pressure but it is moderating and is up approximately 2.5 percent and it is important to note here we didn't experience any at the state level any minimum wage rate increases in our company markets. Management labor as George talked about, one of our key focal points, management labor cost is up 90 basis points in the quarter, about two thirds of that increase coming at the incentive comp line as we paid out more bonuses for those historically high guest satisfaction scores. The remainder of the increase, as George alluded to is due to our staffing levels as well as salary increases of approximately 4 percent. Benefit costs up 20 basis points all of the medical line, I think that is not new news, most businesses these days are experiencing double digit increases in medical expense. was showing a 100 basis point improvement in the quarter and that's led primarily by low energy costs. G&A in line with expectations at 9.6 percent of revenue. Amortization, as we discussed, amortization was down by 1.3 million dollars, reflecting our adoption of FAS 142. Interest expense, we find the we are benefiting nicely from the new credit agreement that was put in place last November. but also our debt levels, we paid down approximately 20 million dollars of debt since year-end and at the end of the quarter total debt level stands at 55 million dollars. Tax rate consistent with the expectations at 36.5 that does show a 30 basis point improvement again due to the adoption of accounting for goodwill.

A very quick look at a couple of items on the balance sheet. Cash investments quarter end over 10 million dollars. Debt is, as I said, at 55 million dollars and that's 50 million dollars outstanding on the revolver, actual shares outstanding at the end of the quarter is 37.2 million.

Now I will rapidly or quickly here with a recap and an update to our previously issued guidance for the full year. I will just cover changes to guidance here or updates to guidance. First as account sales, as we discussed we now expect system wide account sales for the remainder of the year to increase by least 2 percent. Now combining this expectation with our first quarter performance yields full year system wide account sales to be in the range of 2-2.5 percent. As to the overall restaurant margin before preopening, for the full year 2002 we are currently expected to be similar to FY01 results and as everybody would recall that was 15.5 percent last year. This is consistent with our previous guidance as we discussed.

However, as we expected and discussed last quarter, we continue to experience a few shifts in our restaurant margin. Let me take through some of those. First at the food cost line, and I think we really as a management team we emphasize this point that George made. We are absolutely committed to our strategy of reinvesting a portion of the savings generated by supply chain back on the as we are really committed to improving our food. And we believe our April menu enhancements demonstrate this commitment. As we look at it, we expect continued food cost improvements from a more favorable commodities environment and from our supplies chain initiatives. As a result, we could see food cost dip into the 26s for the full year. As to labor, we expect labor will continue in the mid upper 32s as we invested on people strategies and focused on improving the guest experience. At the line, we are hoping for continued favorability in energy related cost resulting in a low 25s . And now to interest expense based on our current interest rates and our current debt levels, interest expense for 2002 is now expected to be approximately 2.5 million dollars. And finally as to EPS, we have raised our full year guidance to 2.11-2.15 dollars based on the target sales trends we have been seeing. And I will remind everyone of course this does exclude the impact of any additional share repurchases for the balance of the year. Let us now open it up for Q&Q.

Thank you Steve, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key. Once again if

you have a question, please press the one key.

Our first question is from of CIBC

Good morning, two questions. First is several of your competitors in the bar & grill segment have articulated the strategy of trying to enter small markets as their new wave of growth and falls, have you cut your comps vs. small markets vs. larger markets to see if there has been any impact in competitive entries and how do you generally keep track of that to make sure you are not blind sighted? Secondly, could you quantify the amount of pricing you think is in the franchisee comps if you are able to?

I will try to take the first one and George may be you could talk about on the franchise side. I think Don, in our small markets, your question was do we keep track of accounts, do we watch those competitively, I think Don, we have not disclosed and we won't on this call today, the kind of account sales dissection by large or small markets. I think in many of the small markets that Applebee's has entered we do enjoy a competitive position being the best restaurant in town in those markets. I think we already expected over time, as long as there wasn't competitive intrusion that we would enjoy favorability in comps, assuming local communities and continued retail vibrancy. So, we think small towns are really a good opportunity for us and we will talk more about that at our conference in May. Now, as to pricing built into the franchise comps I will turn over to George to speak about that.

You might guess with franchises in basically 49 states, virtually in every , we have a variety of different competitive comparisons and pricing can vary pretty greatly depending on both the demographic area, the economy, and our competitive position. So, we see pricing across the pretty wide range, and it is hard to bowl or the different mixes, but I think generically speaking we would expect that out of that 4.1 percent in the quarter from franchises, you might get that overall maybe half of that could be pricing. Not overly aggressive, franchises have not positioned themselves to be out of the range of what we want them to be, but they are taking advantage of pricing opportunities which we support that makes us stand up in a particular market.

Thank you.

Our next question is from Paul Westra from Robertson Stevens.

Hi guys, great quarter. Could you comment first on unit development, just making sure that is on track for the year to mention, and could you give us the breakout for the comps on the company source side between price and mix and traffic?

No change in our guidance on company development, 25 company stores for the year, 80-90 franchise, feel like we are right on track on that and feel good about that. I think the break out, and I think you asked the question what is the breakout on the company side, on the company's comps pricing versus traffic, for the quarter I think I characterize traffic as being flattish just given what happened with the Easter flip and some other we had in March. The mix would be a substantial part of that comp increase, but it is really driven heavily by the state promotion we had, which tended to be more of an average check driver for us at higher price points anywhere from 10.99 dollars to 11.99 dollars, in some cases 14.99 dollars for the Porterhouse. So, it was really more of a promotional shift than anything else.

Great, on your share count the stock price is up a little bit, should we be forecasting, it has been flattish for a while. Are you going trying to keep up with the share repurchases to keep that as flat as possible?

Yeah, I think we are opportunistic, we have got about 12 million remaining on our facility and we will certainly go into that more in May. As has been our practice over the years, where we have demonstrated that we support our stock and we have repurchased a substantial number of shares or so.

Thank you.

Your next question is from Allan of US Banc.

Good morning. Steve, I just appreciate the line-by-line guidance at the restaurant level and I guess the question is, you have said that for example food cost could go into the lower 26s, which is a full point to point and a half or below. So there is a point saved. What is your sort of long-term run rate is in terms of the cost side? Does your guidance assume that food costs will go down there or is that will that just be to earnings?

I think we are assuming that we are going to see a continued favorability there. It is against the strategy of balancing that between our very clear commitment to improve our food and we aren't wavering on that, we are committed to that as a team, but the work of David Parsley who is our Senior VP of purchase and distribution and his team really started with our supply chain initiative last year. We are so pleased with the results that we are getting out of that. We feel like we can still put the food on the plate, improve the menu, and be in the 26s on food costs.

It also allows us to invest what we think strategically we need to which is the management labor line. So, it allows us to really fund that in part 2 and maintain our margins.

Okay but what about my question of the range of 2.11 to 2.15 for this year, does that assume that food costs are in the 26s or maybe so in the 27 percent? (Allan Hickok - US )

It is assumed they are in the 26s.

George you might have mentioned this, did you say, you said that ad spending would be up in dollars, not as a percent of sales, did you mention the dollar amount?

I did not. Our revenue based system line is up 8-9 percent, so the dollars are up proportionate in that regard and as a percentage of sales on the national level are the same. I didn't say how much that would be, I don't really know.

Or the magnitude?

Take the projected. The system revenues times 2.25 the national contribution. I will get that at the end of the call.

That is a significant number relative to competition.

And again as important to the dollars going up is the fact that our TRPs are up 20%, half or so coming from buying power and half coming from just the dollars. So, that is roughly 70 million in the national fund that is going in of which about 55 million

dollars is going to network.

Okay, great. Thanks.

Our next question is from Jeff Omohundro of Wachovia Securities

My question is really is the one on the same line on the spending. I see you are getting the leverage you had expected. I am just curious on the ad rate leverage, how long do you think that is sustained? And, given that magnitude of benefit, I just want to know if there is any time when you would actually look at cutting spending?

When network is actually next month in May, June and the expectation is that rates will remain relatively flat, means, which is good because your economy went down pretty significantly. As far as cutting the rates, I don't think we would see with the brand of our and the growth that we have ahead of us, that we would ever want a whole load of things that will diminish the ability to leverage our brands.

There may be some important way out there Jeff, but I don't think it is in the foreseeable future.

I think we have talked about this before, but I think you know this management team has got a strong point of view that we are in area here where big brands like Applebee's will be using national media to drive consumer awareness in a way that has never been done before. You look at our commitment to that, you look at our creative, you look at the credit that our guests give us, the recognition that we get out of our ads, and we think it is the time to keep that burner turned up and our franchisees support our national level strategy that we are going down. We have really only been on the air meeting for a couple of years for building brand awareness with the early part of that cycle and we just feel that like that is a big part of our story going forward.

Thanks very much.

Our next question is from Janice Meyer of Credit Suisse First Boston

Hi, Could you just talk about what you might expect from the mix shift with the new menu given that, I think you said that "Honey of a Deal" item will be on and some other things that you are increasing prices? Secondly, on labor line you indicated earlier that there was higher staffing management and you are able hold hourly flat, could you talk more specifically as to what the increased staffing is on the hourly side? Is it more servers or fewer tables per server and your earlier guidance for labor was in the low 32 and now you are saying high 32 and your comp guidance is better. So, what has changed on the cost side?

There are a number of good questions there. We will take the first one on food cost and then we will speak about laborers, higher staffing and the change in guidance. I think first of all on food cost, we are not anticipating due to the introduction of this new menu or for Honey of a Deal, to have any kind of, of that is causing any meaningful shift in our theoretical , we can't point to anything.

Because it blended between .

Right, and that is the beauty of our menu, it is a varied menu. We don't tend to either from a commodity exposure or necessarily a mix shift tend to be at risk in any one particular category. So that is not the big part of the story. The important part of the story is starts on how our operations team continues focus on managing waste and supply chain initiatives really coming to bear here. Now as the labor I think your question was at the hourly level, I am going to ask George to comment on that.

As to the effect of full staffing on hourly. Through the last two years especially when the market was a little bit different for employment, we saw many restaurants that were not fully staffed, not to the point that it was a crisis situation, but not at optimal staffing levels. So, now we basically are at par at each part of the restaurant so that we have some backup at hand. So, that would mean in the some restaurants in some cases you have better coverage of tables per server, which should enhance guest experience. An it was really different pockets in different markets. Some more competitive than others. In our new restaurants, we were not of a concept that ever had to not open restaurants because we couldn't get staff, but certainly in some restaurants we were in our optimal level than we wanted to be including quality of voice across the board.

We were in the last quarter I said low 32s, now our guidance is now mid upper 32s. I think the shift really there is all around making sure that is our managers continue to drive guest satisfaction and that we in the symptom plans on the balance core that rewards not only top line and profit growth but also guest satisfaction growth. We give ourselves the ability to do that and that is what the change in guidance is all about. It is about making sure that we can provide that opportunity to those general managers.

The pro forma is on the customer score, a high-grade problem to have, but much better than quicker. our senior VP of has done a great job of leadership in the focus on customer scores. We basically are rewarding our managers heavily for that and that we believe will continue to drive sales to what we ultimately can bring that cost as a percentage down, but we are not going to be there for a while and we think it is the line of investment.

Do you have anything done concrete on the hourly like you did on the managers? You know on an average two more hourly people per store now?

I don't have that, but we have a pretty elaborate system that sets par levels by restaurants and we have a signaling method that shows they are understaffed, fully staffed or over staffed, in degrees within that. And, by region we are fully staffed and as a whole we are fully staffed. So, that will mean that our complement of 75 per hourly employees in our restaurant, we are within an acceptable range of that. When we started laboring in a much more focused way productivity per man-hour and that continues to come down. So, we know that while we are staffing at higher levels, we are getting better productivity per employee too.

Our next question is from Brett Levy of UBS Warburg.

Can you give a little bit more color on guest satisfaction? How many different metrics you look at? Following along that on the compensation side, what piece of general manager compensation is that, and if you can give a breakout of the other things that you are looking out and how it shakes out 40%, 30% ............,? And then a quick feel on the competitive landscape.

That has got a lot. Give us clarity, I got the first two, guessed that what do we look at general management comp? How does that fall and what was that third part of the question Brett?

Just regarding competitive landscape. Within the competitive landscape, actually more on the real estate front, what are you seeing with respect to pricing, timing issues with respect to contractors and are you having the ability to go back and renegotiate existing contracts and leases that haven't actually broken grounds?

Brett, I will start here. I will take you with the last question, real estate. George will follow up with a review of a kind of the satisfaction that creates and how they work on the bonus plan for the GMs. I think we see there is no single brush and single color you can wash over what is happening nationally in real estate. We have got markets like Las Vegas where Las Vegas has being actually on fire, but we are seeing some willingness in some developers in that market especially to be more realistic in terms of what their properties are, but in terms of going back and renegotiating, we are not seeing a lot of that. We are seeing certain markets absolutely still being on fire from a construction standpoint with costs, markets starting to moderate. So, I think we don't see it, as generally as crazy but in some of the East Coast markets you just can never say that. So, it is not a big part of the development story, but these days we still see intense competition for the best sites in growing trade areas that has never gone away and we will continue with that to find work even a the dog fight on the gray corners.

On our customer satisfaction point, we look at 20 different questions that are asked, so 20 different elements in the guest experience. Internally then we have a focus of five of those that we are most directed at, and two of those focusing around on the delivery of food and the service are those that are tied into the compensation. And our management team can get up to a 20 percent multiplier or additional amount over the other bonus components for performance on customer measures. The other elements of our compensation for a manager are what you would expect sales and margin and more highly rewarded if they accomplish both, and they also have a component for retention of hourly staff, which is probably a little bit different in the industry approach, had been historically.

Our next question is from Robert Derrington of Morgan Keegan

Hi George, gentlemen, great quarter by the way. Could you give us some view on the roll out of the new menu and how the perceived check average will change from that? Is there a price increase implicit there or menu mix shift anticipated in the 2 percent comp guidance?

Well the menu roll out which will be at the end of this month is system wise, company and franchise. In company stores we are not taking any appreciable price increase of significance and we would not expect that the overall check range would change as a result, if you get them on your earlier question. The newly introduced items are pretty much across the board in different menu categories and it is really geared towards price value. That is our in there.

So in your assumption of a 2 percent of the comp gain for the balance of the year, does that reflect flat traffic, an increase in traffic, or could you give us some color?

This is all about more value to the customer, we expect by giving the customer more value that the component of this story is driving traffic, we are not in an environment here where we are going to put our price value equation at risk by taking pricing unnecessarily. We will be smarter when we put more food on the plate, I think we talked about more about it in our conferences before on checking for example that is a 60 percent increase in the protein and we are taking a small modest increase in price. So the overall perception of that item is improved. So we are looking to as we go forward we will be driving traffic to our stores.

Great, thank you guys.

Our next question is from Peter Oaks of Merrill Lynch.

I was curious if there was anything discernible as far as your comp trend by day part or weekend weekday and the other one on the retention program, was curious as to what kind of buy in are you seeing with franchises with that kind of framework?

Well, we want you to take the retention piece first and then will speak to day counts. We started the retention program as a company vehicle, it's been introduced in pieces between management and hourly over the last year and a half, we have gotten our franchises very involved in this through their HR people, held a number of conferences and workshops. It is gaining some pretty significant momentum and acceptance by our franchisees. Especially if they see us take the lead on this and starting to get results. So I think there is going to be a delayed cycle to that but definitely it is after a good start.

I think you first question was if we see any differential in our day . I think we continue to see strong performance as we have on Friday, Saturday night and then early week no real big change from what we had before. I think if you layer in there over the quarter, you did have some events like Super bowl, and we had Easter and we had the Olympics. So we did see, if you look at it in a micro basis, we did some changes. But overall we see pretty much the things continuing strong weekends and about the same early week.

And the big thing is to get back to where we where post Sept. 11 on early weekend.

And nothing there like lunch vs. dinner?

No. Not really. That is not a big part of it.

That is not to say we don't think longer- term opportunities to enhance our lunch business. But we have seen it drop off.

Okay. Thank you.

Our next question is from Bryan Elliott of Raymond James.

Good morning. Just a couple of housekeeping items. What was the out depreciation in the quarter?

You mean dollars, or percent?

Dollars.

We are about 8.4 million dollars for the quarter in depreciation and amortization. That is for the company.

Could you help us save some time may be and can you give us a 2Q range of EPS that is embedded in your new full-year guidance?

Well, as much as I would like to say, clear that anguish and those questions I think we are just at this point talking about our full year.

Thank you.

Operator we are finished the hour, let us take one more question here.

Our last question is from Andrew M.Barish of Banc of America Securities

I am surprised to see the waste numbers that are with George in the restaurants in 4Q?

Well, life is full of serving surprises.

I didn't really have any other questions other than on some of the management retention and bonus programs and those kinds of things. Do you lap any of those stuff in terms of putting initial plans and paying up bonuses and . This really is a sort of another ?

We continue to evolve at the incentive part, we talked about earlier that was introduced in the 3Q of last year.

That is the long-term incentive plans?

No. That is the one for customer satisfaction scores and the incentives around retention. Those in 4Q right now really picked up steam as far as the of the momentum of accomplishment of the business objective and then the pay up. Really some in 4Q but a lot in 1Q.

Thanks.

Thanks everybody. All of you can tell that we are pretty excited here. We will look forward to seeing you in May at our conference. Thanks for joining.

Thanks again.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this point. Good day.