Dine Brands Global Inc (DIN) 2003 Q1 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today. At this time, I would like to welcome everyone to the IHOP first quarter 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad. If you would like to withdraw your question, press star, then the number 2, on your telephone keypad.

Thank you. I will now turn the call over to Stacy Roughan.

Good morning and thank you for joining us for IHOP's first quarter 2003 conference call. Today with us from management are Julia Stewart, President and CEO, Tom Conforti, Chief Financial Officer, and Greg Nettleton, Chief Marketing Officer.

Management's formal remarks will be accompanied by a slide presentation which is available on the Company's Web site at www.ihop.com. If you have access to the Internet and haven't done so already, please take a moment to bring up the presentation on your computer screen to follow along with management's presentation. You should now advance to slide 2.

Before I turn the call over to management, I would like to remind you that today's conference call contains forward-looking statements as noted in slide number 2. These forward-looking statements include such words as may, will, expect, believe, plan or other similar terminology. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to, risks associated with the implementation of the Company's new strategic growth plan, the availability of suitable locations in terms of the sites designated for development, legislation and government regulation including the ability to obtain satisfactory regulatory approvals, conditions beyond IHOP's control, such as the weather, natural disasters or acts of war or terrorism, availability and cost of materials and labor, costs and availability of capital, competition, continuing acceptance of the international House of Pancakes brand and concept by guests and franchisees, IHOP's overall marketing, operational and financial performance, economic and political conditions, adoption of new or changes in accounting policies and practices and other factors discussed from time to time in IHOP's filings with the Securities and Exchange Commission. Forward-looking information is provided by IHOP pursuant to the Safe Harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. In addition, IHOP disclaims any intent or obligation to update these forward-looking statements.

Now I'd like to turn the call over to Julia Stewart.

Thanks, Stacy.

We are pleased to be able to talk with you today about our strong performance for the first quarter 2003. This is the first of what we believe will be many solid quarters to come as our marketing and operational initiatives take hold. Let me share our financial highlights during the first quarter.

As you know, we've done a significant amount of work to set forth our vision of becoming number one in family dining and developing the strategies that will get us there. Now we're executing against those strategies. We announced our new operating model in January which will transition IHOP from a capital intensive restaurant development model to a model where our franchisees finance new restaurant development. This will allow IHOP to invest its time and resources in critical marketing and operational activities that is designed to drive systems wide sales growth. We also announced a move to return cash to shareholders in the form of a quarterly dividend and share buyback program in March of this year. These two business developments and related reorganization needs have resulted in a charge of 6.7 million, or 19 cents per diluted share in the first quarter of this year. As a result, we reported net income of six million, or 28 cents per diluted share for the quarter. Excluding this charge, we reported net income of 10.2 million, or 47 cents per diluted share, which is a penny better than the first quarter of 2002.

If you move on to slide 4, you'll see the bottom line results were driven by top line performance. System wide sales for the quarter were strong at 413.8 million, which is a 13.1 percent increase over the first quarter last year. We experienced strong system wide sales growth due to our continued development efforts, but more importantly, our restaurants experienced increased comp store sales in the first few months of this year as guests have found new reasons to visit IHOP more often. Our guests have responded to the call of our new ad campaign, "Come hungry. Leave happy", and they are doing just that.

Comp store sales increased 2.2 percent for the quarter. This represents the largest quarterly gain in comp store sales for IHOP in almost five years. And while the rest of the category was down during the first quarter, our comp store sales performance was significantly better than the competition. We universally reported negative comp store sales. Not only that, our performance compared favorably to our strongest quarter in 2002. Our marketing strategy is doing exactly what we said it would do. Our Chief Marketing Officer, Greg Nettleton, joins Tom and me today and we'll talk to you more about this in a few minutes.

We opened 20 new restaurants, primarily in the Midwest, Rocky Mountains and the western regions, of which 17 were IHOP developed and three were developed by franchisees. Our franchising activities included the sale of 11 IHOP developed restaurants, three restaurants developed under our franchise investor program, which we call FIP, and we rehabilitated and refranchised one restaurant during the quarter, for a total of 15 franchised restaurants. We ended the quarter with a total of 1,118 IHOP restaurants nationwide and in Canada.

If you move to slide 5, we are executing on our marketing and operational strategies and these efforts are beginning to demonstrate the positive changes that we are committed to at IHOP. Nowhere is this more evident than at our National Franchise Convention that was held in Colorado Springs last week. Nearly 900 franchisees, employees and vendor partners were in attendance and I have to tell you, the excitement generated at the NFC was contagious. The spirit of leadership and collaboration we have fostered over the last 12 months came full circle at the best NFC yet. Our franchisees are energized. They are seeing the benefits of our new marketing and operational initiatives in their restaurants. Simply put, more guests are coming more often and our franchisees are making more money. Our franchisees are doing their part by delivering a consistent guest experience with terrific promotional products and improved service initiatives. We've gone back to the basics of delivering a great guest experience, one that exceeds their expectations. You know, when we embarked on our journey to become number one in family dining, I asked for the support and commitment of our franchisees and since then, we have aligned our resources and efforts in that direction and our franchisees have truly begun the process of operationalizing our vision.

IHOP has also provided the important leadership our system needs. We've made breakthroughs in the first quarter with an advertising campaign that resonates with our guests and shows an upbeat positive portrayal of IHOP today. Our media buying during the quarter reflects an aggressive targeted approach and included our first national network buy. We created great new reasons for guests to visit with our Never-ending Pancakes and Stuffed French Toast promotional products. And our improved approach to operations is going to make our marketing efforts even more powerful. We've enhanced our program to train more than 55,000 IHOP family members to deliver each promotional product consistently and at the restaurant level. We're also providing additional training support to improve hospitality and service within our restaurants. Finally, at our National Franchise Convention last week we kicked off our mystery shop program. The franchisees and operators are excited about the consistent guest feedback and have embraced the challenge of becoming number one. Our brand has taken a giant step forward and I am happy to be able to share the excitement we've created together with our franchisees.

And with that, I'd like to turn the call over to our Chief Marketing Officer, Greg Nettleton.

Thanks, Julia. It's great to be here today to share such good news.

If everyone would turn to slide 6. We've produced solid results in a relatively short period of time and our strategies are in place for continued success going forward as we enhance our brand and marketing process through 2003. We approach our marketing strategy in three key stages. In stage one, our objective is to create a traffic building set of programs, including promotion, advertising and media buying that energizes systems, deliver improved financial results and provide a platform for future programs. Our 2.2 percent comp store sales in the first quarter is an initial indication of the benefits from this strategy.

In stage two, our objective will be to address the menu by determining what needs to be added to be competitive, what needs to be removed and what needs to be enhanced, either via tape or a presentation. Over the next several months, our strategy will be to aggressively address this important area.

In stage three, we will leverage and strengthen the brand to gain substantial competitive advantages. This is where we address brand touch points as we work to define and articulate our own brand personality, from the tabletop to our operations to the advertising you see on TV, connecting with our guests, our employees and all other members of the IHOP family. Our goal in this process is a net sum gain. For our franchisees, that means little incremental costs versus existing programs as we implement brand enhancing programs.

Move to slide 7, please. So far this year we are benefiting from a number of initiatives that we set in motion in January 2003. The new advertising campaign from our agency, Los Angeles, means TV viewers have a compelling reason to watch our ads and importantly, to remember what they have seen. By offering strong limited time offer promotional items, like Never-ending Pancakes and our own propriety Stuffed French Toast product, we are giving our guests new reasons to visit IHOP, whether they are current IHOP guests or maybe those who haven't visited us in awhile.

Looking at our comp performance relative to these promotional items, Never-ending Pancakes produced a negative .4 percent comp store sales increase overall. However, this included the effect of two weeks of adverse weather across the eastern half of the United States. This significantly impacted the positive trend in comp sales levels in the Never-ending Pancakes produced during the first five weeks of the promotion. If we exclude the adverse weather weeks, Never-ending Pancakes averaged comp store sales of 2.7 percent. Stuffed French Toast performed well beyond our expectations at 6.3 percent average comp growth for the first four weeks of the promotion. These four weeks fell in the final weeks of the first quarter. Stuffed French Toast promotion does span over both the first and the second quarter.

Our promotional strategy has driven the frequency of existing guests and brought people back into our restaurants. In the process, we've also unified the system and leveraged the efficiency afforded a system of nearly 1,200 restaurants. Changes in media buying strategies means consumers are seeing more of our ads than ever before and in the addition of national media, which is a whole new dimension for the way we support our business. On Monday, we introduced our third product promotion of the year, Paradise Pancakes. Paradise pancakes continue to leverage our core strength in the breakfast day part, while also providing IHOP the platform to bring a bit of paradise to our guests with effective new in-restaurant experience.

Moving to slide 8, please. In order to bring more guests into our restaurant, we have three key targets in the marketing areas that we address with each and every effort. Our first goal is to increase our level of awareness. We are setting aggressive goals internally as we continue efforts to increase this key measurement. Our second key goal is to drive traffic which is key to growth in our industry. Increasing awareness will help us do that, but we must continue to offer strong promotional items that will motivate guests to visit more often. Our third goal is to drive significant comp store sales growth which is truly an outcome of the first two activities.

With several additional promotional products in the pipeline, effective media buying stages--strategies now in place and operational and training initiatives to create a great guest experience, I am confident we will be able to continue driving improved comp store sales performance. Our marketing efforts are creating change at IHOP and, as Julia mentioned, our franchisees are excited, they're energized. And as a company, we at the IHOP brand are equally energized as we continue our quest to become number one in family dining.

Now I'd like to turn it over to Tom for more details of the financial overview of the quarter.

Thanks, Greg. On slide 9, you can see that we have a solid first quarter in 2003 which reflects the great strides we are making in re-energized marketing efforts and improved operational initiatives that both Julia and Greg just spoke to. We've also made an important transition this quarter to new segment reporting information. This is aimed at providing all of you a better understanding of our business going forward as well as those businesses we are exiting as we transition our operating model, which I'll walk you through in a moment.

During the quarter we reported net income of $6 million, or 28 cents per diluted share, which includes a non-recurring charge of $6.7 million, or 19 cents per diluted share, and that was related to expenses incurred as a result of the transition to our new operating model. Net income, excluding the charge, was 10.2 million, or 47 cents per diluted share, for the first quarter. This represents 4.1 percent and 2.2 percent increases in net income and EPS respectively. Total revenues for the quarter were $94 million, or a 15.3 percent increase, compared to the first quarter 2002 of $81.5 million. This increase was driven by increased sales at the restaurant level throughout our franchise systems, as well as the benefit of new restaurants franchised during the quarter.

Moving on to general and administrative expenses, which were 12.3 million for the quarter, a 14.8 percent increase compared with the first quarter last year, largely due to increases in labor related expenses. General and administrative expenses were three percent of system wide sales in 2003 compared to 2.9 percent last year. This increase reflects our investment and initiatives required to operate our new business model, while continuing to execute our old way of doing business.

If you move to slide 10, as Julia mentioned, we incurred $5.5 million and expenses related to the write-off of development costs associated with potential sites that we are no longer going to develop as a result of the adoption of our new business model. In addition, we incurred approximately $1.2 million in management consulting and legal fees associated with the transition to our new business model. Going forward, we anticipate additional reorganization charges of approximately $2 million for the remainder of 2003.

On to slide 11. As you know, we now report revenue and profit in four key segments; franchise operations, rental operations, Company operations and financing operations. As we previously announced in March, we're implementing this new segment reporting beginning in the first quarter 2003 and we've restated our financials for 2002 to allow for ease of year-over-year comparisons. On our March 24th conference call on strategic financial alternatives, I detailed what goes into each one of these segments and our 10-Q, which will be filed later today, will also provide added detail. Please review these sources for the detailed information that goes into these segments.

Revenue from franchise operations increased 12.5 percent to $33.8 million for the first quarter as compared to $30 million last year. This was due to a 13.9 percent improvement in retail sales in franchise restaurants, primarily due to an increase in the number of effective restaurants to a total of 903. Also, average sales per effective restaurant increased 3.9 percent to $397 thousand. Franchise operations profit increased 12.9 percent to 18.4 million for the quarter due to the increase in effective restaurants and average sales per effective restaurant, as well as the 2.4 percent increase in comp store sales at franchise restaurants.

Rental operations revenue increased 18.1 percent to 28.3 million as compared to 24 million last year. This was due to an increase in the number of franchise restaurants from 830 to 913, as well as an increase in the number of operating leases. Rental operations profit increased 28.4 percent to 8.3 million. This was due to increased revenue from IHOP owned properties that have a small amount of rent related expenses.

Company operations revenue increased 10.6 percent to $19.7 million for the quarter. This compared to 17.8 million last year. This was due to an increase in the number of effective IHOP operated restaurants and the 7.9 percent increase in the average sales per IHOP operated restaurant. Effective IHOP operated restaurants increased to 76 from 74 for the quarter and average sales per effective IHOP operated restaurant increased to 259 thousand from 240 thousand last year. Company operations profit increased to a negative $1.2 million from a negative $800 thousand for the quarter last year. This was due to higher labor costs associated with the hiring of assistant managers at Company operated restaurants and the opening of some new restaurants as Company operated restaurants.

The last of the new segments we are reporting is financing operations. Financing operations revenue increased 25.5 percent to 12.2 million for the quarter compared to 9.7 million last year. This was due to an increase in the number of IHOP developed restaurants sold; two more franchises versus last year for a total of 11 stores sold during the quarter. It also reflects a higher receivables balance for which we received interest income. Financing operations profit, however, decreased 5.6 percent to $5.4 million versus 2002 due to additional interest expense associated with our recent private placement in 2002.

Move on to slide 12, our balance sheet. The balance of cash and cash equivalents at March 31st, 2003, decreased to 65.4 million from 98.7 million principally due to our decision to invest our cash balance in short term investment grade corporate bonds. The balance of property and equipment increased 4.9 percent to $300.2 million from $286.2 million at the end of 2002 due to new restaurant development. Long term receivables increased to 333.5 million from 332.8 million in 2002 due to our financing activities associated with the sales of franchises and equipment. Franchise fee notes totaled 45.7 million, while equipment notes totaled 155.4 million. Our direct financing lease receivables was 132.4 million. Long term debt was 145.3 million due to our private placement. Stockholder's equity at the end of the quarter was 365.8 million versus 364.4 million at the end of 2002. Cap ex, which included our portion of the 17 IHOP developed restaurants opened during the quarter, was $27.3 million.

As recently announced, we are implementing a dividend program in recognition of our reduced need for capital and anticipated improved cash generation as we transition to our new operating model. A week from Monday, on May 19th, IHOP will pay its first quarterly cash dividend of 25 cents a share to shareholders of record as of May 1st of this year. Future dividend declarations will be made at the discretion of the Board of Directors and will be based on such factors as our earnings, financial condition, cash requirements, future prospects and other factors.

Now I'd like to turn the call back to Julia.

Thanks, Tom. If you move to slide 13, let me walk you through an outlook for 2003 before we take your questions. We reiterate our expectation of net income per diluted share in the range of $1.55 to $1.70 for 2003. We plan to develop 55 to 60 Company financed restaurants and 20 to 25 franchise developed restaurants for a total of between 75 to 85 new restaurants this year. Accordingly, cap ex is estimated to be approximately 90 million to 100 million. System wide sales are expected to range between 1.55 billion and 1.6 billion. Free cash flow is expected to fall within the range of negative 25 million to negative 35 million.

You know we really are excited about the future and with that, we're pleased to answer any questions you may have. Operator, if you want to open up the lines.

At this time, I would like to remind everyone if you would like to ask a question, please press star, then the number 1, on your telephone keypad. we'll pause for just a moment to compile the Q&A roster.

Your first question comes from Michael Gallo with CL King.

Hi, Mike.

Hi, good morning.

Good morning.

I guess a couple of questions, first question being I was wondering if you could comment at all on what kind of same store sales trends you saw in April, and assuming that those continue to be relatively strong and given the out-performance that we saw in the first quarter, I was just wondering if there was anything out there, any reason why you weren't bringing the guidance up other than purely being conservative for the year.

Hey, Mike, you know we don't disclose this policy comp store trends in future periods, so we really can't respond to that. And we feel quite comfortable with the 155 to 170 at this point, so there's no impetus for us to change that just yet.

OK, fair enough. I was wondering how--if you can comment a little further on how the transition is going for--the transition of the model, whether it's building backlog. I know you just had your franchisee convention, I was just wondering if you can give us a little more color on the feedback that you're getting there in terms of franchisees' level of interest in continuing to develop new units as well as interest from new folks who are currently--who currently don't have any IHOP units.

Yes, that's a great question, Mike. It's interesting you would say that; we had development workshops and financing workshops at the National Franchise Convention last week and it was standing room only; they were very well attended. Our existing franchise base is extremely excited about development, they are thrilled that we have brought to bear a couple of major companies that will help them with the financing, we've walked them through the steps, we have got a line forming of existing franchisees in the queue, ready to sign the development agreement for the future. So I could tell you unequivocably the existing franchise base is extremely excited and energized about the prospect. Largely our multiunit operators, but we've actually had a fair amount of interest even from our single unit operators that have now got mechanisms for access to capital. So all in all, we couldn't be more pleased with our existing base of franchisees who are thrilled with the opportunity and are rejuvenated and, frankly, sort of exceeded our expectation just based on last week's interest level at the convention. And then again, as I mentioned on the last call that we had in March, we have a fair amount of interest outside the organization of people who are currently not an IHOP franchisee, but have begun the process of requesting the information to become a franchisee.

And then last question and then I'll turn it back over--into the queue. In terms of the Company operations, under the new segment reporting, obviously now you're counting the depreciation and amortization against the Company operations expense line and given that, obviously it appears to be really a drag on your earnings. I did notice that the percent change in average sales per effective restaurant increased significantly above where the system wide same store sales were. I was wondering when you think we can expect to see that segment contributing. I know you've added some labor initially. I was wondering if you could maybe talk about some of the other initiatives there and how those are going.

Well, the--as you know, the Company's store base is an interesting quandary for us because the truth of the matter is we bring in some new restaurants, try to rehabilitate, have some existing restaurants, there is no question that a concerted effort is being made as we speak against those Company stores in terms of adding assistant manager labor to really beef up what we believe is the right thing for the business, demonstrate to the franchise community that additional management does make a difference. We have really done a wonderful job of keeping retention in the restaurants, minimizing turnover and, as you know, that's the start of a turn of a restaurant.

So I am cautiously optimistic about this year, being able to see some of these restaurants really turn to profit. But candidly, Mike, as you know, as soon as we do that, we sell them. So the truth of the matter is we will refranchise them just as soon as possible. So there'll always be a bit of that revolving door, albeit I hope that to slow down considerably on a go forward basis. But I will tell you there is an awful lot of focus and attention to making those both profitable and frankly, doing the right thing for the business. But I think that takes time.

OK, thanks a lot.

Your next question comes from Victor with .

Thank you.

Hi, Vic.

Hi, there.

Good morning.

Good morning to you. A couple of questions; have you folks figured out yet how you're going to transition the old franchise model folks? I mean obviously you don't want to keep expanding with franchises with the opening one at a time; you want more of the big operators. And given your geography constraints in terms of territories and also just will you let someone rollover on the old model or force them to the new model? I mean, have you figured that out yet or is that still work in progress?

Vic, two things. First of all, we are absolutely, positively focused on just great operators so we want great operators in the system. And quite candidly, that can be multiunit operators or single unit operators. And if you think about our geography and what's available, in some cases it's large areas and that may be more appropriate for an area developer, and then again we have areas where you might set a restaurant here or a restaurant there and it might be more appropriate for a single unit operator. So quite candidly, we believe the new model lives in harmony, you know, the small, the medium and the large, we believe we can make it work for everyone. And last week's conference indicated that that is exactly the case because we had a really nice mix. Now again, this was our existing franchise base of single unit operators, five to 10 unit operators, and then larger operators, you know, 20 units plus. But we believe all of those can live in harmony really, given the geographic disbursement of where we are today. So we feel very comfortable about that going forward. Largely however, the people that are in line today who are not IHOP franchisees who want to become one, largely those are fairly large multiunit operators for other systems.

OK. But if someone has their current agreement coming up for renewal, they've been around for a long time, do you have to--do they have to be grandfathered under the old agreement or can you get out of being involved in the financial commitment going forward...

Vic, I think that's a critical strategic question that the senior team back here has to think through a little more. We're not prepared to commit one way or the other and hopefully within the very near term we'll have a clearer, more articulate strategy on how we're going to handle those transitions.

OK. And then lastly, on the menu side do you have a sense of how often you need to rejuvenate--I mean come out with these Stuffed French Toast type new products? Is that something you have to do once or twice a quarter or is it just a few tweaks to the menu and then it's more of stable.

Well, it's a two-pronged strategy. First and foremost right now, we have clearly demonstrated that this 45 year old American icon has a lot of interest and if you give people a reason to visit, you remind them about IHOP in conjunction with the advertising. So right now we believe there is more need for some of those limited time only product promotions. Over time, as we evolve the menu, it can be more of a reminder, if you will, for existing products, but right now, given the cycle that we're in vis a vis the business cycle, it's more important that we do more of those product promotions than less. I think as we take the core menu to its next evolutionary step, you'll see a lot more of the reminder kind of advertising, you know, hey, don't forget to come in for these--this wonderful product or this wonderful product. But right now I think--and quite candidly, we've been very successful in short order, so I think short term you'll see more of that type of LTL product.

Alright. Thank you.

Yes.

Your next question comes from Dennis Joe with Fidelity & Company.

Good morning.

Hey, Dennis.

I was wondering if you could give us the more concise timeframe for assigning new franchisee agreements and then also discuss how the franchisee financing environment is right now.

Dennis, let me take the first part of the question and I'll let Tom take the second part. We are well underway in negotiating development contracts to go through a period of time with our existing franchisees, as well as beginning the process of being--bringing in new franchisees. So certainly for the balance of this year, as we sign up major franchises, we'll begin the press release order of communicating with all of you about who those people are and the timeframe we're looking at. So that's in short order, but certainly through the balance of the year we'll just issue press releases.

The second part of the question obviously had to do with financing and what's the market like.

Hey, Dennis. We had a financing workshop at the NFC and we've organized with two separate groups that we're not prepared to disclose right now, which were present at the NFC; two separate groups for general financing programs. And I think the reaction of franchisees were that they seemed like good programs. in addition, we've organized an SBA guaranteed loan program with another large financial institution which we hope will enable some of the single unit guys, who are terrific operators, to be able to realize their dream to open up a second or third store. And so I think the reaction of the franchisee base was very favorable to the conditions. But you know that business, the devil's in the details, and so what we did is facilitate a lot of exchanges between the financing entities and our franchisees and we'll be--we'll be walking our franchisees through that process to give them the best chance they can to secure financing.

OK. And just one last question, for clarity's sake, does that $1.55 to $1.70 EPS guidance, does that exclude the $8.7 million in charges expected this year?

No, the 1.55 to 1.70 includes the effect of 8.7. So our number, if we extracted that $8.7 million, would be outside of the range of 1.55 to 1.70 at this point.

OK. OK, thank you.

Thanks, Dennis.

Your next question comes from Mike Smith with Oppenheimer.

Well, good morning.

Hi, Mike.

How are you?

Good.

Tom...

Are you OK? Did you survive the storms?

Oh, sure. You know, it was the north side of town.

Ah, it always is north of the river, we know that.

Interesting.

An inside Kansas joke. Alright, Mike.

We're still looking for Toto. Tom, did I hear you correctly that you wrote off $4.5 million of real estate in that $6.7 million write-down?

If you--did I hear 4.5?

Yes.

No, it was 5.5.

And that was just real estate?

It was--those were costs that we put on our balance sheet in preparation of developing restaurants ourselves. And so it wasn't real estate, it was largely fees and associated costs with building up the sites to the point where we could develop them. We closed that that were on our balance sheet.

That sounds like a lot.

Well, you know, Mike, our company was on an accelerated path of development so every year we had to develop more and we gave our development group clear instructions. We gave them instructions that we wanted a more even distribution of development over the year instead of in the past. And so in order for us to meet this accelerated development schedule, so if we're going to grow in the old model, we had to develop more restaurants, and the fact that we wanted a more even distribution of restaurants during the year. Our development guys did a terrific job under the old model of really building up a pipeline of between 80 to 100 restaurants reedy to go, ready to be developed, and so when we made the decision that we did, we had to reverse all of that.

OK. Was the 2.2 in consulting and legal fees, were those things that were just coming in from the work that Smith Barney had done and the work that has done over the last couple of years or how did those happen?

Well, not the last couple of years, but over the recent period, the decision period from January through March. And so it was largely , our attorneys and Salomon Smith Barney.

You mentioned just one place else I did want to go, but did you say guaranteed loan program and if so, is that a guaranteed loan program where corporate guarantees the franchisees...

No, no, I said SBA guaranteed loan program. We are not into--we are not in the business of guaranteeing loans.

Oh, thank you. Just had to ask.

Yes.

And in terms of your re-segmenting your revenues and so forth on the historic basis...

Yes?

Well, in your 10-Q, will those be filed for the--for last year?

Absolutely. On the press--on the press release rather--Mike, did you receive a copy of our press release?

I have a copy of the press release, I guess I mean the first quarter.

Yes. No, in the press release, the last page in the document is a--is a new schedule which lists 2002 by quarter and then cumulative.

OK, I just hadn't gotten to page 4. OK.

Alrighty?

Thanks, Mike.

Thank you.

Your next question comes from Greg Schroeder with Fulcrum.

Hi, thank you. Most of my questions have been answered, but just wanted to check the cap ex guidance for the year. I think you said 90 to 100 million...

Yes.

Yes.

That's correct? But I was wondering, if you--an IHOP developed restaurant, if it's running two million or so a restaurant and you do 55 to 60 this year, doesn't that get you north of 100 million a loan? I was wondering if you could help me out there, what I'm doing wrong.

Well, the assumption that $2 million a unit is the right number is not the case; it's less than that. And so we think that it--we think that 90 to 100 is the right number.

Some of those charges were--we started to incur last year. Again, to Tom's point earlier about the pipeline, as you know, you take the hit whenever those expenses are incurred. Some of those development costs for this year's 55 to 60 actually incurred last year. So some of it's carryover, some of it's just real numbers this year. And then that total cap ex number also includes a bit of money for IT and so forth; there was always a bit of money in there that was not associated with development. But the large majority of that money is all development costs and we're very comfortable, certainly based on first quarter's results, we're--it's a good question, Greg, but we're pretty comfortable with the number.

OK. And then the 1.2 million piece of the charge for consulting and legal, I know you broke it out as a reorganization charge this quarter, but in past periods was that in G&A because I know you've had some consulting charges or expenses in the past?

Yes, the 1.2 million would have been in G&A. The 5.5 would have been in our asset base that we amortize, so--but the 1.2 is definitely in G&A.

OK, but this quarter you did break it out as a separate--you repositioning charge?

Well, we did because it's strictly--those costs would not have been incurred had we not made the decision to change the way we run our business and our decision to declare a dividend.

OK. And then just one more final question. Is--you gave us the quarter restatements for 2002 with the new reporting format.

Yes.

Have you--will you be able to provide on an annual basis, say for 2000, 2001, under that format?

You know we've decided to only restate 2002 and I mean it's possible that we can do that, it's just--it creates extra work on our side. But if we hear, Greg, from enough people that that would be critically valuable that they get that information, then we can probably go back a year. We'd rather not go back to 2000; it's a bit of a stretch.

OK. Alright, thank you.

Thank you.

Your next question comes from Beth Lilly with Woodland Partners.

Hi, Beth.

Good morning. How are you?

Good.

Hey, Beth.

Hi, Tom. Say, I wanted to explore a little bit more, I know you've been hesitant to commit to targets in terms of where you think you can--as the new strategy unfolds where you think you can take operating margins to, and I--you said give us time and so I'm asking the question once again, wondering if you've--if you're willing to commit to targets.

Not to targets specifically, but with--what I'm comfortable committing is directional movement in our operating margins and what I can say is that we expect operating margins to steadily increase from this year through 2007.

Is that...

We don't give targets, we don't provide that level of financial statement detail.

Yes. OK, so steadily increase meaning 50 basis points a year, 25 basis points a year, can you give us some kind of sense?

More than 50 basis points a year.

More than 50?

Yes.

So more than 50 and less than 100.

It's bigger than a breadbox.

I like this game.

It's bigger than a breadbox.

OK, more than 50, less than 100.

If you want to go there, you can go there.

I would definitely say more than 50 and let it go at that.

OK. Alright, that's terrific. Thank you so much.

Thanks, Beth.

Yes.

Your next question comes from Roger Lipton with Lipton Financial.

Hi, Roger.

Hi, guys. Nice to talk to you; haven't talked to you in a long time. Quick question; in terms of third-part financing, can you give us any idea for the franchisees and the new strategy, any idea what interest rate would be involved? I know you're not establishing the interest rate, but can you give us a ballpark, what kind of--current, what kind of rate people are talking in the third-party financing business?

The only thing I would say on this, Roger, is better than the interest rates that we were financing them at.

I mean a few years ago it was up around 11, 12 percent for build-to-suit money when the myriad third-party guys are out there. There are a lot fewer of these than there used to be, I just wonder what ballpark rates they're kind of talking. Is it...

Greg, you know the only rates that we've made available--the only programs that we made available are more traditional programs and so in the traditional financing world, the rates we would charge on average, we've disclosed historically interest rates in the 11 percentage range, and the rate that the financial institutions are prepared to offer are better by some margin than what we were offering the franchisees ourselves.

OK. Well I know that no deals have been done yet. Presumably something will start to take shape. Can you give us a little more guidance in terms of...

Actually, as you know, Roger, 10 to 15 restaurants a year are built by our franchisees and those guys have been getting good rates historically and better than our rates. So if you went back and talked to some of the existing franchisees who over time have been building their own restaurants, they would tell you they've been getting pretty favorable rates. And of course they talk amongst each other and they feel very comfortable, the guys that have already been building every year, that they can do considerably better than our 11 and 12 percent range.

OK. We'll track it. We can get that.

Yes.

Out there in the industry, the information's available. So thanks very much.

Right. Thank you.

Thanks, Roger.

Thank you, guys.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1, on your telephone keypad. We'll pause again to compile the Q&A roster.

At this time we have reached the end of the allotted time for questions. I will now turn the call over to Julia Stewart for closing remarks.

Thank you, operator. Well you know what, thanks again for joining us today. I want to say thanks to Greg and Tom for being here. If you have any questions at any time, please feel free to call either Tom or myself or Greg or Stacy directly and we'll talk to you soon.

Thanks so much.

This concludes the IHOP first quarter 2003 conference call. You may now disconnect.