Dine Brands Global Inc (DIN) 2002 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Applebee's Second Quarter Conference Call. At this time, all participants are in a 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. 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 second quarter 2002 conference call. As you know, this call is being broadcast simultaneously over the Internet. A couple of calendar items to note: comparable sales for the August fiscal period will be released the week of August the 26th and third quarter 2002 earnings are scheduled to be released on Wednesday, October 30th after the market closes with our conference call on Thursday morning, October 31St at 10 a.m. Central Time. As we continue with our remarks, many of the statements we are about to make with respect to our business outlook including comparable sales increases, costs, earnings per share growth, and new restaurant development are forward-looking and based on current expectations. There are several risk 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 cost, and inflation. You should review our Form 8-K filed with the SEC on July 16th for important information about factors that could cause actual results or events to be materially different and also not they are consistent with our normal practice -- our quarterly reported on form 10-Q was filed with the SEC last night following our earnings release. With that, I'll turn the call over to Lloyd Hill, Chairman and Chief Executive Officer.

Well, thank you Carol DiRaimo. I couldn't pass that up. Good morning everybody. Thanks for being with us. I'm here with George Shadid and Steven Lumpkin also. To start with summary, I would like to make some introductory comments and I'll cover the following three broad areas. First, an overview of our second quarter results, an update as to the status of the strategies that we outlined this past May, and then finally a word on our sales performance and trends. But first just a brief recap here on our bottom line results. As you saw in our press release, diluted EPS increased 19 percent to -- [God bless] to 37 cents as compared to 31 cents last year and that's adjusted for our recent three-for-two stock split. Net income increased 21 percent in the quarter. Steve's going to cover more details on Q2 later in the call. Our return on equity exceeded 24 percent. It remains one of the highest ROEs in the industry. Strategy; in May, we outlined our strategic directions and some specific growth initiatives. Here's a quick update on our early progress on company's key initiatives. As part of our strategy to improve our food, we just recently introduced a new menu in more than 1,400 restaurants. The menu includes some really great new items and we improved many of them. We improved them in quality; we improved them in portion size. And I'll tell you from my perspective and that may be more important from perspective of our franchisees, this roll out was flawlessly executed. I think we have clearly demonstrated our ability to improve our food while driving down food cost. Said in another way, I think, we really started to leverage investments we have made in our supply chain initiative. Now, as part of this strategy, you can expect that we will continue to evolve our core menu by upgrading quality and increasing portion size.

Our next menu roll out will occur in the fall when we expect to add several new items and continually improve others on the menu. Actually, this fall menu is rolled out in October. Nearly, 50 percent of the menu will be new or improved over the last 18 months and our pipeline of new food is very strong. So, we look forward to an exiting '03 menu rollout as we continue, I think, to execute really well against this part of our strategy. Now, on the marketing front, as I have talked about many times but I think it's important that we continually be clear on this. We're shifting from our previous limited time offer strategy, the LTO, to more seafood events. And we're doing that in order to leverage the improvements we've made to the core menu. Our current promotion, Neighborhood Block Party, again mid June and that features three items from the core menu. The much-improved Fiesta Lime Chicken, as I've said before, 60 percent larger than it was in the past, our Fajitas, the new Cowboy Burger, as well as our always-popular Oriental Chicken Salad. A kind of -- [side] here, I'm going to tell you this Cowboy Burger has been one of the most successful new product introductions in several years. It's commanded an impressive part of our campaign sales mix and its being greeted by the guest with great reviews. Now, the Neighborhood Block Party promotions strategic positioning is to feature new and improved items from the core menu, as I've been talking about it. I think it's important to note that, other promotions that we run may have a distinctive price value message, others still will promote convenient elements like To Go or still will promote signature food that you can only get at Applebee. So, my point here is that our promotional efforts are going to be a strategic blend of these key elements.

Now, as part of our convenient strategy, we're all really enthusiastic about the roll out of phase I of our To Go initiative, which is going to be completed system-wide in just the next couple of weeks. We think our positioning as the most conveniently located concept in casual dining, is a natural fit for the strategy and it meets our guest demand for food on To Go. George is going to talk a little bit more about To Go in just a moment. As we also announced in May, part of our growth strategy is to use our strong balance sheet and our free cash flow for franchisee acquisitions. Two weeks ago, we announced that [with] recent agreement to acquire the Washington DC market. So I'm very pleased that we are going to be able to integrate market with excellent growth prospects into our portfolio, and Steve is going to give you more color on this topic in a few minutes. Let me move to a few thoughts about our sales trends. First, as reported, system-wide sales for the quarter were a record $812.7 million. That's an increase of 11 percent over the prior year. Year-to-date, we exceeded $1.6 billion; that's also up 11 percent. So, I think, we're on our way to substantially exceed $3 billion in total system sales for the year. And we're really also pleased that system-wide comparable sales increased 3.2 percent for the quarter. That surpasses our expectations. System-wide comparable sales for the year-to-date period are up 3.3 percent. Now, these system-wide comps put us ahead of the casual dining industry on a year-to-date basis; and that's according to the [mark of Nap, the Nap track]. As we close the quarter, there is no question that June sales were below our trends for the first five months of the year. And this was the case with almost everyone in casual dining; our June comparable sales results were negatively impacted by the Memorial Day holiday and, then, the remainder of that week. Now, something happened with the consumer in that week; and we're not really certain at this point, where to rely. But, I think, prevailing fury hazards that in the first holiday, post September 11th that Americans did a lot of reflection with family and friends in the backyard. Now, as to July, we're pleased that July comparable sales results showed an improvement over June; system-wide comparable sales increasing 1.5 percent, and that includes 1.8 percent increase to franchise restaurants and a 0.3 percent for company restaurants. July comparable sales were very, very strong during the 4th of July week. But then they trailed off over the next three weeks. I think, it's an important point here to note that the company traffic in July returned to the level we've experienced for the year. So as we assist the July results -- well, we think a combination of several factors are at work here; and first and most obvious is the consumer continues to be bombarded by strain of bad news that this seems to hang on forever.

We think there is a cumulative effect of this news that creates more value-oriented, perhaps, the most conservative mindset with certain consumers. And we think value is even more important now than after September 11th; and as many of you know, we've not been active in taking price increases as some more large casual banners have. Moreover, our July promotion, [indiscernible] Neighborhood Block Party was really not designed to [shove] value from the treetop. The strategy of promoting new and improved items is, I think, it is very sound; but at [indiscernible] press the timing was not the best, given the near-term environment. Our view is that the current environment is not going to be a lasting one for the consumer. We continue to do the long-term sales outlook favorably as eating out has just firmly established as part of the consumer lifestyle. And with that more favorable and long-term view on sale we, therefore, continue to expect system-wide comparable sales to increase by at least 2 percent. And that's for the remainder of this year combining our year-to-date system-wide sales performance with this expectation than we expect system-wide comparable sales to increase at least 2.5 percent for the full year. So, in closings, I just want to reiterate that we're confident, that our strategies are alive for a long term, and that we're focused on staying the course and executing our plans. And we're pleased to deliver above expectation system-wide comp sales and greater earnings for the quarter. So with that, I'm going to turn it over to George Shadid.

Great. Thank you, Lloyd. Now I'll turn our attention to the real execution at the restaurant level and after that against the environment that we've operated in the last few weeks. Our guest satisfaction store scores continue to improve, as they have over the recent quarters and weeks. They've reached all-time levels -- of high all-time levels. A big part of it is coming from our investment on the people front. You know, consistency and guest satisfaction are at the end of the day driven by our people; and as we discussed in last quarter, we continue to devote additional resources to our people strategy, the increased management staffing levels, our new incentive comp plan for management, and retention [programs]. These continue to have a near-term impact on our margins, as our labor cost continues at the high 32 percent. But these investments are designed to improve executions, which lay our annual results in higher guest satisfaction, which we're now seeing and we believe are critical in building long-term sales and traffic. As I said, our labor remains consistent with Q1 at 32.9 percent. Our staffing continues to have all-times highs. We're effectively fully staffed at the [indiscernible] and management level. And turnover continues a roll of about 20 percent for all management [indiscernible] for general management. So we think these efforts are paying off on two of the three fronts, that being guest satisfaction, and high and lower turnover, and higher retention. And we will see the sales impact in the future. And now, let's look at the -- just for a minute the manual marketing Lloyd spoke, as always we've been doing in the marketing front -- and I'll tell you little more about our promotions during the quarter and what's coming up. You know, we completed the 8-weeks' Steaks and [indiscernible] promotion in late April, and next was our 8-week "Honey of a Deal" promotion. A very popular promotional that featured Brady's Steak [liver] and chicken with a new honey flavored sauce we introduced last year. This promotion was directed at the value proposition and fared very well prior to the Memorial Day weekend. This was priced at 8.99 to 10.99. Also, during this time period, we introduced a new commercial, which had a new looking thing to it and set to a very popular music. This commercial on a note rated very highly with our consumer; and in fact in advertising age, it was rated as one of the top highest -- or one of the top 10 commercials in consumer recognition along with the [Verizon] and AT&T commercials. Our third promotion of Neighborhood Block Party, which we believe was a good promotion but not one of our better ones. And it introduced a new item, our Cowboy Burger, what Lloyd talked about, which has had very strong consumer preference among our guests and we believe meets the need of strengthening our core menu with very strong items that really have guest appeal. Our next promotion begins next week, Hometown Barbeque. It features our signature and very popular riblets, as well as barbeque chicken and barbecue stack stake. This promotion is going to run for seven weeks, basically till the end of the September. Now on To Go, let me just remind during one of some of the aspects of our To Go program. We introduced our first phase in June and we will be in all system restaurants by the end of this summer. The roll outs is going very well, as Lloyd remarked on, and the To Go program has been [solemnly] embraced by both our company and franchise operators. The strategy, again consistent and heightened To Go experience for our guests, playing on convenience that the guest is looking for and especially capitalizing on our location convenience with over 1,400 Applebee's. We provide an enhancement and service delivery through our new telephones, communication and heightened delivery in consumer convenience with our new packaging. We also introduced a new in store signage program. You know, I want to remind you too that we had about 4 percent mix from To Go sales prior to the introduction of this program, and that was without having a really -- a consistent well designed program. It was very localized; now, you have consistent To Go service in all restaurants regardless of franchise or company or location. We continue to test the Curbside delivery method and expect that a significant roll out with Curbside beginning next year. We're going to support our phase I with local media later this year and national media will be behind To Go next year once we have substantially all of our restaurants on the Curbside delivery. So in summary, we're excited about the progress of To Go. It's going according to plan, and we're excited about the customer reception. But more importantly, we see the importance To Go will play to our top line growth in the future. Couple of other operating initiative programs that speak to our major strategy that convenes in execution.

Our first is a kitchen display system we've talked about over the last year or so. We're now rolling that out in over a 100 company restaurants between now and Thanksgivings. We just started a couple of weeks ago. This is a great example of using state of the art technology to increase the speed of our service and importantly the quality of our execution. The system allows a coordinated preparation of food that facilitates, not only food being delivered fast, but more consistently hot and according to specification and standards. We had a great reception in the field. We spent a lot of time in the last couple of weeks looking at this system in operation in our restaurants and I am witness to the fact that it has a great impact on the customer experience and the efficiency of our staff. Another convenience initiative is our gift card program, which is being introduced in August, system wide to all 14 other restaurants. It will be in place for our traditional marketing gift certificates, which will this year be gift cards during the holiday period. These two programs are very important to customer satisfaction, and as I said, we are at all time high on our CSI index. You know, Lloyd said it well, we are confident in our strategy that the operating and execution levels are on track and they're going to garner great returns for the future, but importantly our investment in our people will have long term positive impact on the company. On the margin side, I just want to comment on that briefly. Our restaurant operating margin was at 16 percent this quarter before pre-opening. This is one of highest margins we've had in a number of quarters. Our cost chain is in line on all fronts. Usage at 26.3 was 60 basis points less than last year and hit a new low. Now, this is important given that we've continued to drive our cost through our supply chain management project and re-invest simultaneously in our menu. So we've got the best of both worlds here. We're increasing the value of our guest, increasing the strength of our menu and food offerings and lowering our costs. Our operating costs were in line, including utilities coming down from previous year highs. On development, we continue to be on course to reach 105 to 115 new restaurants this year. That comprised of 80 to 90 franchise [dealers] and 25 company. Development will be heavy in the later part of this year, as expected. And our opening schedule by quarter is on track with our earlier expectations. We've already opened an additional 15 restaurants since the end of the quarter, 11 franchise restaurants and four company and we're under construction currently on over 40 restaurants with more slated to begin in the next few weeks for completion prior to the holidays. So at closing, we are hitting operationally on all fronts. We continue to strengthen the brand image, our execution on food and service continues to increase and be better and we're increasing the retention of our [great] people and we're improving the food most importantly. So operationally, I feel, we're hitting on all fronts and are well positioned for a better environment on sales in the future. Steve.

Great. Thanks George and good morning everybody. Let's takes a quick look at our overall results, and then I'll hit some highlights on the P&L. I'm going to end here, and talk a little bit -- give you some color here on the Washington DC acquisition and then reiterate top line, bottom line expectations for the year. So lets take a quick look at sales. Company sales up 10.4 percent overall to nearly 179 million, this was driven by comps, as Lloyd mentioned, of 1.4 percent and by eight new openings year-to-date on the company side. Now, it's important to note here in the last 12 months, on the company side, we've opened 29 new restaurants and that's an increase in unit capacity of 10 percent. Franchise income was up 6.7 percent to 25.5 million, and that's driven by those strong franchise comps we experienced of 3.7 percent and 24 new units opened year-to-date. Openings over the last year in the franchise side have driven a 7 percent increase in unit capacity. Now, revenues for the quarter exceeded 200 million, and naturally, first time in our history, they were up 10 percent to 204 million. System wide sales for the quarter came in at nearly 813 million and are on track to substantially exceed 3 billion system-wide for the year. System-wide sales were up 11 percent driven by strong comps of 3.2 and over a 7 percent capacity growth in the last year with 100 new restaurants opening over that time. Net income came in at 21.5 million and that was up 21 percent versus last year and this performance, as we've said before, includes the impact of our accounting change for goodwill. Now, if you take that change out, net income was still up a solid 15 percent, and we're very pleased with those results. Now, as to diluted EPS, we earned 37 cents a share versus 31 last year, and that's up 19 percent. Again, when you take out goodwill, EPS was up 12 percent for the quarter. Now, here is a couple of quick hits on the P&L. As George talked about, we're very pleased with the performance we're getting at the food cost line -- food cost coming in at 26.3 percent. Not only do we continue to benefit from a great supply chain initiative, but I think we're also in a favorable commodities environment. Labor, overall was 32.9; that's up 110 basis points, and that's consistent with the trend we've been running over the last few quarters. Hourly labor was up 30 basis points, and I think we do continue to see some moderation there in wage rate pressures and with wages up in the mid 2 percent range. Management labor; management cost was up 60 basis points and again about two thirds of that increase is due to increases in bonus as we paid out more for those great guest satisfaction scores that we're experiencing, and the remainder of the increase is due to us and being focused really on full staffing of our units. And we're seeing also a mid 2 percent, kind of, wage rate inflation there at the management line. Benefit costs are up 20 basis points and that's -- I think you can pretty much trace that all to what's happening with work comp. It's not news, I think, to anybody that post 9/11 some of the insurance markets are experiencing some pretty hefty increases.

D&O, 60 basis point improvement, and that's led primarily by lower energy costs that we're experiencing. G&A, 10 basis point improvement at 9.6, as we're rolling over some nonrecurring costs we had last year related to our strategic project, as well as supply chain. Amortization, shows a decrease there of 1.4 million versus the prior year, and that's of course the change in goodwill accounting. And at the interest line, as we've mentioned before, we're benefiting not only from a great credit agreement that we negotiated last year but also a favorable interest rate environment. I think it's important to note here, we paid down $42 million in debt since yearend, 33 million of that was in the quarter and we ended the quarter with $22 million in debt and that's a debt to capital of about 8 percent. So as to our tax rate -- our tax rate is at 36.5 percent, and that's really consistent with our expectations and that shows a 30 basis point improvement due to the change in goodwill. Now, here is a very quick look at the balance sheet, and that's you can -- let me go to the 10-Q, we filed in a very timely fashion last night, for more details. Cash and investments at quarter end were over 8 million, debt was at 33 million, and I believe earlier we spoke on that. I'm just correcting myself here, debt at 33 million at the end of the quarter and we have 28 million outstanding on our $150 million debt facility. Revolver actual shares outstanding at the end of the quarter were 56 million. Now, here's some quick color here on the Washington DC acquisition we announced two weeks ago. We're going to be acquiring 21 restaurants in the DC ADI. This acquisition will add an excess of $40 million to our top line.

We're going to be paying 32.8 million in cash consideration. These are good operations, and we think we really got some nice opportunities to improve sales. All the restaurants are cash flow positive and they have experienced, I think, back-to-back positive comps both last year and this year running nicely positive. 12 of the 21 properties are fee owned, and we see a lot of development potential in this market. We've been working the market diligently. We've already approved a sight in the market in Stafford, Virginia and no matter what happens here ultimately with this acquisition, we will continue to develop this market for the company as we currently own the development rights for the market. I think we would expect to see some G&A leverage as we would bring this revenue into our sales base, and I think we're clear now on the timing for this transaction. September 13th will be the final sale date, and we would expect a close in the fourth quarter of the year. Given the timing of this closing, we see minimal impact on this year's earnings and it'll certainly be accretive next year. Our 2002 CAPEX expectation of 60 to 65 million currently excludes any impact of this acquisition as we are currently refining some of our assumptions on what kind of technology and remodels we'll be making in this market. Now, lets wrap it up here with a -- with kind of a recap of what our top line, bottom line guidance is for the balance of the year. As Lloyd mentioned, we continue to expect system-wide comps for remainder of the year to increase by at least 2 percent, and if you take a look at our year-to-date performance and combine it with that expectation, we're looking at full year system-wide comps of at least 2.5 percent. And now at the EPS, our full year guidance is now a $1.42 to $1.44 in line with consensus estimates, and that does exclude the impact of any additional stock repurchase that we would have here in the balance of the year. So that concludes our prepared remarks. Operator, lets open it up for Q&A.

Thank you. If you have a question at this time, please press the "1" key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue please press the "#" key.

Your first question is from John Glass of CIBC World Markets.

Thanks. Good morning.

Good morning John.

Couple of questions, first on the phasing, you know, to go. Have you experienced any incremental labor expenses as you've been doing that or would that may be more apparent in the third quarter, if at all, and then the second part of that question is have you included any, you know, positive comp impact in your guidance to go in the third and fourth quarter?

Yes, John, I think we're not seeing any labor impact in this current phase to go roll out. I think we're anticipating any of these factors into the guidance we're giving for the rest of the year our expectation on what's going to happen in this current phase or to go.

Okay, and can you quantify what you think that impact is?

You know -- we haven't, John -- we haven't been really talking about that with really any body in any level of specificity. I think we've been spending a lot of time understanding the dynamics of this part of our business, and it is our fastest growing day part and I think we're pleased with how the roll out's been going. And I think we're looking forward to not only the impact this year, but also next year when we go with [Curbside, which also is going to have, we believe, some nice favorability.

And then secondly on the sales -- commentary on the sales in July and you sighted may be it wasn't as strong a value orientation and the promotion in the last part of the quarter. But it doesn't sound like you're changing any of your plans or are you going to address, may be, near term value need by the customer specifically or stick with the plan for the rest of the year?

I think, John, you know, we're -- just given the size of our system and supply chain, you know, we are gaining plan for this year and really in many respects part of next year is set. A lot of the media has been brought and I think as Lloyd said in his remarks, you can expect to see from us the mixture of not only, you know, promoting our core menu but also value, and I think we've been talking a lot with this script on this call about how value and price value is so important for us in our positioning. So I think you could expect that in the future you'd see us execute against that strategy.

Great. Thank you.

: Operator: Thank you. Your next question is from Joe Buckley of Bear, Stearns.

Thank you. Hello everyone. I've got a couple of questions as well. First [on that] you go -- your phase I basically just signage and consistent packaging and then as an add on to that, it sounds like you've definitely committed now to Curbside service in phase II. And I'm just curious what, kind of, drove that decision?

Hi Joe, it's George. Phase I really included four components, the signage, which you said, and importantly the packaging, but also revised and consistent service techniques, telephone techniques, standard procedure on how to suggestively sell on the phone and really extend the convenience to the customer. And we had an extensive training program around that. So there was a lot of training and reorientation from a more localized approach or no approach if to go [indiscernible] offered. In the second part.....

...it was driving from why we're going to Curbside George.

That was just, its really around convenience.

Yes. It's really [indiscernible] it's the ultimate guest friendly solution and since we believe it's a substantially different occasion, we think that when we offer Curbside in most of our restaurants, we're still conveniently owning convenience, Joe. It's going to have a significant impact.

Okay and then just a follow up. I know on the new menu, the one that was rolled out, I believe at the end of May, there was no price increase. It doesn't look like you picked up any mixed benefit either, and I guess I'm wondering if you were surprised by that, or you know you thought that it might go that direction? Or was that just a reflection of the consumer being a little bit more conservative of the fact that it didn't look like there was any?

You mean change in mix you mean in the guest [check].

Yes.

It wasn't designed necessarily to introduce higher priced items that would drive up check. It was to get preference, increased value, and increase the quality portion , and really balance out the menu. And we think when we look at the mix of what these new [indiscernible] pleased with them it wasn't design that we should see a lift in [indiscernible] because of the introduction of differently priced items.

Joe, I think its true. I mean if we step back from where we are in the evolution of this menu, I don't think any of us believe we hit the tipping point yet where we've introduced the upper [ponderance] of improvement and new menu items. That's why when you look at hour game planning going forward, we've got another menu -- menu improvement we'll make in the fall. We've got another we'll make next spring. So I think as we start to get more into this -- the implementation of this strategy, especially, next year when we really get a [preponderance] of the menu, its looking working different to the guest and it evolves. I think that's when we think we're going to get more of a -- of some of the credit [indiscernible] from the guest were some of the things you had mentioned. So this is in many respects, you know, a moving picture or a story here that'll continue to evolve.

Okay then lastly just on the price value front, kind of, a related question on menu. Do you think you'll look for any price increase or maybe check average increase in the fall menu? And I'm just curious the Hometown Barbeque promotion or feature that starts next week, will that be more value oriented than the Neighborhood Block Party or -- where would that fit on the value scale?

On the barbeque, a component of it is riblets and that has always been perceived and marketed as a very high strong value for Applebee. So there is certainly a value promotion there when you look at what you pay and what you get. And that's something we've traditionally promoted at different times through the year. So we look to that to be a strong promotion and a value proposition.

I think Joe on the pricing front; I think, you know, we do and we are looking at competitive pricing. I think we'd say our competitors probably have been more aggressive than we have, and you know, we stick to our principles; price value leadership is very important to us. We are in a favorable cost environment here and perhaps there is, at some point here, the ability to take a little more price. But I think we're going to do it really based on a competitive [set] look. And what we want to do is introduce items on our menu that will not only have -- be highly valued by the guest but also overtime, you know, create, you know, a broader range of price points than we currently have.

Okay, thank you.

You bet.

Thanks Joe.

Thank you, your next question is from Andrew Barish of Banc of America.

I had just a question on the food cost outlook in the second half of the year. Your numbers have typically run around 27 percent. Is something below that, you know, possible in the second half of the year?

Andy -- Andy good morning. I think that is, you know -- I think right now given the environment and we look ahead with the menu and I think we're -- we think the food cost is going to continue to trade, you know, in the 26s, so I think that's a good expectation.

Thank you

Thank you, your next question is from Chris [Ocol] of Morgan Keegan.

Yes, thanks good morning. Few questions -- what the price point range will the Hometown Barbeque promotion be at and how does that compare to the promotion that you ran last year?

The -- in company markets, the Hometown Barbeque is 8.99 on one item, 9.99 and then 10.99. So 8.99 to 10.99 and that compares last year to a slightly less fixed scale at 10.99 and then the two items, at 6.99 and 8.99 for Fajitas.

Okay. Has the company started buying network spots for next year?

We're in the midst of our -- completing our...

You know we...

...[indiscernible] of networks.

Yes, we participate in the up fronts and...

Right.

And so we're -- I mean, we're not done with our media buy yet.

What kind of ad rate leverage are you expecting this year compared to last?

We really don't have a position on that yet. It's been kind of a -- somewhat of a volatile and negotiated situation and we're -- I think clearly it won't be as we saw, you know, in last year where it was down significantly. I think it's a matter of how much will it be.

It was down 9 percent -- 8 to 9 percent last year, and we don't look for that...

We don't look for that...

...reoccur.

Yes I think Chris the [buy] has to land. You know we've got -- you know, we're looking at a -- at you know, tweaking of our blends of 15s and 30s and where we want to be. So it's just a little premature at this point to talk about it.

Sure. One last question. Will the gift cards that you guys are going to be making available this year; will they be available for purchase at other retail locations besides the restaurants?

Not at this point but, you know, longer term, that's certainly a viable alternative that we would look at. Especially with our number of locations and being in every state, there's an obvious opportunity there.

Sure.

You know, we think the gift card is a -- is really a consumer platform that gives us a lot of opportunities, and we think it's going to be very favorably received.

One last question, I'm sorry. I may have missed it, but when do you plan to utilize local store marketing further to go for a ramp?

When we plan to go local store marketing? I think, you can see us in company markets, you know, perhaps towards the end of the year, depending on the evolution of where some of the company markets are -- on Curbside, perhaps later this year but certainly next year will be the expectation. George, you want to add to that...

Yes we are, you know as I said earlier, we're going to be doing some local this year.

Okay thanks.

Thanks Chris.

Thank you. Your next question is from Janice Mayer of CSFB.

Hi thank you. Two questions on the marketing side again. Could you just remind me how much you've spent on national advertising in '01, '02 and sort of what it looks like for '03? Do you think that that the change from limited time-only advertising and promotion? Do you think that contributes to part of the tepid results from the block party? And then finally on the new menu, you really haven't seen -- as you've rolled out new menus with bigger portion sizes and quality ingredients, it doesn't seem like you've seen a lot of impact on the customer traffic on that? So do you think there is an opportunity to invest more of the supply chain savings into the menu?

Janice, this is [indiscernible]. Just the last question, I will tell you I think those initiatives take time. I don't believe that we see those in necessarily insured order, and I think that we are doing the right thing with -- that is the portion size and the quality of food and plan for us to stay the course there.

My opinion on the part two there Janice is that our results -- the tepid results, as you characterize it, had more to do with clearly the dynamics of consumer behavior and being bombarded here, you know, by continued bad news and trillions of dollars that are lost in the marketplace, that it had to do with our campaign and not running the LTO.

Yes, we don't -- I think we don't view that the LTO switch, which is a contributor here to the drop off. I think towards -- generally the sale we have experienced. I think in terms of our -- the first question you asked was on national spending, you know, where we spent in '02, that as required by all of us in the system, you know, 2.25 percent of our top line and that equates to around $70 million in national fund spending. And, you know, one that level was also 2.25 and that equated to, you know, in excess -- well in excess of $50 million. And then in 2000, we were at a reduced contribution. We were 2.1 percent of the system. So, I think, what you have seen is you have seen a not only an increase in absolute dollars but a 15 basis point increase in the required spending level.

And so for '03, 2.25 still of sales but with media rates higher?

With the add rate, we'll have more units of system revenue will be up...

Right.

...obviously. There will be the same contribution rate.

Right. And the media rates themselves will be more expensive than they were in '01.

That would be a...

I'm sorry in '02.

That would be a logical assumption.

Okay. Thanks.

Thanks Janice.

Thank you. Your next question is from Jeff Omohundro of Wachovia Securities.

Good morning. This is John White on behalf of Jeff and I've couple of questions. First regarding growth strategies, in New York in May, you briefly discussed future new growth vehicles for Applebee's, which included brand extension, strategy, and the acquisition of second concept. Can you provide an update on both of these initiatives? And secondly, on the development front, do you have quarter end number of units broken out by market type, you know, mega down to star? And during the quarter, did you see any deviation in sales results by market size going from negative star? Thanks

John for your first question, there really is no movement or no update on brand extension or on new concept acquisition continue to have the provision that we see 14 to 17 percent earnings growth over the next three or five years without doing that. And as of yet, do not have a resource that's focused on those two areas continue to think that probably is about a year away.

On the development, White, I'm assuming -- do we have the number of units we have by markets size?

Right. Yes, listed out in May [indiscernible].

That have -- number one that hasn't changed. That significantly since then -- and we are not going to go on an ongoing basis provide that other than perhaps once a year. So that would not be something we would have interimly. As far as sales performance and market size, we really didn't see, you know, any dramatic difference depending on the size. It's pretty much across the board.

Thank you.

Thanks John.

Thank you. Your next question is from Hil Davis of Thomas Weisel Partners.

Hi, good morning -- good afternoon.

Good morning.

I just, kind of, want to return to some of the same store sales questions -- questions principally, seem why [indiscernible]. I understand it takes some time but to see that kind of drop off from a six and four from April and May to 2.5, I realize it was some slowness on Memorial Day which other restaurants are same, but there's got to be something else that worked. I mean PF Chang had a nice comp. Darden had some nice comps. What else do you think is working? I mean, is it -- are you losing the marginal customer the blue-collar worker do you think? What's going on there? And were there regions like [Contours] and others?

Well on the blue collar, as it certainly, Applebee's has a higher proportion of blue-collar demographics than some of our competitors. And we do believe, and I think most of what's been written and analyzed this that that would be the group that is most impacted by the psychological issues that we really talked about. Not necessarily concerned from the marketplaces in there, heavy investors, but concern of what that indicates in their own situation and just the whole uncertainty. So that -- can't say definitively but could be having some impact on a timing basis, and again this is one-snapshot not a longer-term result.

Hil, good morning. [I think -- it is Steve]. I think when we look at the sales; we're also in talking to some other people in the industry and some people that look at industry sales. We're experiencing as many others are, much like post 9/11 where we had weakness early week, it's actually flipped. There is weakness on the weekend. And we've never and are looking at that particular date [indiscernible] dynamics have had those kind of softness on the weekend. And it's really only been a phenomenon that's occurred in the last, let's say, five to six weeks. Our view is that it is not sustainable much like the early week, the softness post 9/11 went away. This is something that we think reflects just a little bit of, you know, more major kind of consumer's part, more conservative is on, given some of these unusual things that have happened here. And so we don't, Hil, view it as any kind of strategic issue for us. And we'll work for that, you know, that particular softness on the weekends really to start picking back up here, as we go later in the summer.

And just to add to that about the weekend. You know, on weekend, not only, the traffic shift but also the check has contracted a little bit not that, you know, the dominant piece of this change; but it's certainly a contributor to that, you know, the bar usage on an average check would be down because of less on the weekend, which is a more a time period and a part of the week where that would be impacted. So we do see a little tightening on the weekend on the check, but it's more of the traffic issue on that, Hil.

Well, I'll add one last thing that [Malcolm now has supposed] and that is the fact that retirees or near retirees are a little bit more concerned about the present economic situation than others. And we do [see] a little bit over. So, perhaps, that's had some impact.

And then, in terms of the delta between the franchise and the company comps, I was wondering, as you [lap] the rollout of the venue in franchisees, which I believe happened in June, July of last year, where do you see the delta between the franchising company comps going? Are they going to shrink a little bit or do you expect to see the same difference, and is that difference due to more aggressive pricing by franchisees?

Well, that gap was certainly more narrow in July.

Do you expect that to kind of continue?

Time will have to tell on that. That's little premature to say.

Okay. And then on the advertising rate -- final question, on the advertising rate in June and July on a year-over-year basis, was it a greater or less or kind of flat?

Yes, Hil, it was equal.

Okay. Thank you all very much.

Yes. Thanks Hil.

Thank you. Your next question is from [Monica Cashmere] of Piper Jaffray.

My question has been answered. Thank you.

Thank you, Monica.

Thank you. Your next question is from Peter Oakes of Merrill Lynch.

Hi, good morning. I actually have a couple. The first one is related to the new menu evolution. As you continue to make inroads on the quality and the portion sizing, are there any plans specifically to communicate this to the consumer besides just awareness when they get their food?

Well, we've not spoken about that, but certainly as you continue to build that menu out, one could make a case that advertising around a new menu could be a tactic for us.

But there's nothing near, near-term that will attempt to communicate that?

I think that's correct in the near term.

Okay. And also on the -- you know, whether be temporary or even we'll see if it's more residual, the shift in the consumer psychic that you're mentioning. Besides the bar mix on the weekend, are you seeing anything related to appetizer or desert usage or even some of the higher price points?

Slight. Not necessarily price points, but slight on the add-ons, good appetizer and desert. Again, I think, the issue of the contraction of the check along those lines for our appetizer is, you know, not the deriving force, it's a contributing force.

Right.

Exactly

Okay, thank you.

Sure thanks.

Thank you. Your next question is from [Paul Lester] of SG Cowen.

Yes. Hi, it's Paul Lester. I just wanted to follow-up, maybe a little bit more about your comments on the erratic behavior, you hit most of it, but can you just talk a little bit of maybe about the geographic -- anything going on there geographically on the behavior of lunch versus dinner? Then lastly, I think you had to hit on this again, but the -- your average check is up so the customers that are coming are ordering a lot. So when you're talking about a need for value message. Is it right to assume that, therefore, you were just missing your bottommost economically sensitive customers? Is that a true conclusion?

You know the first part of -- this is Lloyd. I think, all we could say relative to geography is that we really do see -- have seen some impact in Michigan, for example from the...

From the Michigan, yes, yes...

...we're seeing more couple of other major cities were flat, where we -- we didn't want to bring that up to the sounds like an excuse, but we did see some pretty significant impact from people [pertaining to these places].

Well, we've a lot of stores in Michigan and New England. And you know with the new -- [the Red Wings and the Hunt for the cup] and with the [Celtics], you know, the Celtics nets had a big blowout series. And we did see, you know, in June, especially we saw a little down draft. There they came back very nicely, but it's again, it's with, you know, with 70 or 80 stores that got impacted by that. It can move you a little bit.

And those are company stores.

Those are company restaurants. So I think the -- Paul the other was lunch versus dinner? We're not seeing any difference there, on the weekends we're seeing both lunch and dinner, you know, being impacted by, you know, by this little bit what's going on to consumer.

And lastly on the value question, just want to make sure, the people that are coming to store are ordering more than last year on the average check. So would you just say that you are missing the traffic on your [calamity]sensitive customer?

Yes, I think, if you look at our check year over year, in July it really narrowed. We're still slightly above what we were last year, but it narrowed. We were running nicely above it, really through the whole year. So I think it's more, you know, we look at the data as really more an anomaly of how things have come together. And the Neighborhood Block Party had a couple of lower-priced items that really got great preference. The Cowboy Burger at $6.99 drove a lot of preference. So, again that's not a -- that's not a long-term thing for us either.

Great. Thanks.

Thank you. Operator, we're approaching towards the hour set one more question please.

All right, great. Your last question is from Howard Penney of SunTrust.

Well that's great. We can summarize all the stuff, as I can try to put this all together, given the comp performance. If I read you right, the economic malaise which presumably is not going away, because I don't think you're going to predict that the market is going up any time soon. You had some bad marketing and you're going to change that. So, what's in your control is a new marketing program to go, which you presumably assume that is incremental business? For those two things are going to take comps up from, you know, kind of the one-eighth to the above 2 percent for the balance of the year?

Howard, I'm going to go back to your first premise. You know, we continue to get this bad news, it comes almost on a weekly basis now. What's the last thing here; is that quest? I don't it, I think the consumer wants to believe and wants to be in the market. I don't think it's going to take much of our [high yields] for this bad news for consumers to feel more strongly. So, I am not as pessimist as you might be about outlook going forward. I do believe that there is a strong value orientation out there, and I do believe that the campaign that we've got coming up there that George referred to, it's been overtime, one of our strongest drivers on the value side. Did I miss some part of that?

No, I think, they all received -- good morning. I think we've got two. Hopefully, there's a couple of more weeks here before all this big CEOs and CFOs are going to certify their financials publicly. If there is any shenanigans still left in the closet, and one would think that they'd be flushed out here in the next couple of weeks and one would hope that by the middle of August that it is all in the open and that after that things really start to calm down from the standpoint of bad news. Now, that doesn't take aside any additional terrorist activity at anniversary of 9/11 that we're all going to lull over here. So I think in many respects you are right, we are not trying to predict the future but we do view the current environment as one that will go away. We don't think that this is a sustainable thing. You know the last time I checked, people were still eating out and they're still eating. And it's firmly entrenched in what we do. We may see a little penny pinching here and there as people go out may be they don't order the incremental appetizer, the incremental desert, but we think too that they goes away. So I think that's our view on, kind of, the situation.

And may be if can just add one more question. You've stated that To Go -- you expect To Go to be incremental to your sales. Other concepts that have introduced To Go and Curbside To Go has taken 12 to 18 months before it's been incremental and they have done signage packaging service initiatives blah, blah, blah. What is it about your initiative that's different from your competitors that will allow you to -- that will allow that business to be incremental and not just substitute to the first 12 months or 4 percent of your business that's To Go today?

Right. I think on the lines of awareness, it's the number of locations, the consistency within which you can find an Applebee's close to where you live or work. And I think there is a timing issue here too when we had introduced this versus earlier stage introductions, it has become more of a known channel by which to get food. We think we'll capitalize on the timing of that. And just the overall differentiation we're making on the feeling you get in the restaurant when a To Go customer comes in. Just this week when I was in some restaurant actually with -- working with our hostess to see how the guests response when they come into our restaurants without Curbside, and we really take the guests under our wing, guide them to where they get their food, make it easy for them on the packaging, on the whole arrival and exit. So we think that coupled with our neighborhood environment really has a certain connection, especially with our customers.

All right. I'll just close with that. We got more locations within are -- twice as many locations as our next two competitors combined. So you might actually have to make a conscious decision to drive by an Applebee's to go to somewhere else To Go, and we don't think people will do that. Convenience is such a driver. Thanks for the question.

Thank you.

Yes thanks, Howard. Well, thanks everybody for joining us. We appreciate it. We'll look forward to next quarter's call.

Thank you ladies and gentlemen, this concludes today's conference. Thank you for your participation, you may disconnect at this time.