Dine Brands Global Inc (DIN) 2003 Q2 法說會逐字稿

Good morning, my name is Taprika and I will be the conference facilitator. At this time I'd like to welcome everyone to the IHOP's second quarter earnings 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, press "*" and the number 1 on your telephone keypad. If you would like to withdraw your question, press "*" and the number 2 on your telephone keypad. Thank you. Mrs. Roughan, you may begin your conference.

Good morning and thank you for participating in IHOP's second quarter 2003 conference call. Today with us from management are Julia Stewart, President and CEO, and Tom Conforti, CFO. Before I turn the call over to management, I would like to remind you that today's conference call contains forward-looking statements. These forward-looking statements include such word 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 from 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 and term of the sites designated for development, legislation and government regulations, including the ability to obtain satisfactory regulatory approval conditions beyond IHOP's control such as weather, natural disasters or acts of war or terrorism, availability and costs of material and labor and costs of available of capital, competition, continuing acceptance of the international house of pancake brand and concept by guests and franchisee. 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 SEC.

Forward-looking information is provided by IHOP pursuant to the safe harbor established under the private securities litigation reform act of 1995. And it 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're pleased to be here this morning to share the highlights of our second quarter and review some of the recent changes we have implemented at IHOP. Quickly touching on our profit performance, net income was $11 million, or 51 cents per share diluted for the quarter. Excluding one-time reorganization charges of $811,000, our 2 cents per share diluted net income increased to $11.5 million or 53 cents per share diluted. For the six months ended June 30 net income is decreased to $16.9 million, or 78 cents per share diluted. After accounting for one-time charges, net income for the first six months of 2003 increased to $21.6 million or $1 per diluted share.

Our system performed well during the quarter with a 16.1% increase in system-wide sales or $425.5 million. We continue to outperform our competitors by focusing on brand building activities, operating new improvements and enhanced training all of which support our excellent results for the quarter.

Combined our efforts led to IHOP's highest count store sales gain in ten years, which were 4.8% during the second quarter. This reflects the success of our product promotions, including the continuation of Stuffed French Toast and the introduction of paradise pancakes. The Stuffed French Toast promotion benefited from the carry over effect of national network advertising in the first quarter and produced 5.8% comps for a 10-week promotional period.

The launch of Paradise Pancakes during the quarter allowed us to build upon the momentum that we established since the beginning of the year and we took it one step forward. Each participating IHOP provided a festive atmosphere with tropical decorations and Hawaiian shirts worn by the servers to bring a little bit of paradise to each of our guests. In short, it was just plain fun. Our guests clearly noticed the changes and we experienced comp growth that exceeded our own expectations.

Paradise pancakes produced a 4.6% comp store gain for the eight-week promotional period. Each promotion is intended to create new reasons to visit IHOP. During the second quarter, our promotional strategy delivered by increasing guest traffic in franchise and company-operated restaurants and driving strong comp store sale performance.

Our current promotion, Super Stackers is our first non-breakfast promotional item this year. Stackers is being supported by national network advertising campaigns, which is similar to our approach with Stuffed French Toast. In its first month, Stackers has been very well received and we are optimistic of the same in our comp store momentum with this and successive promotions. A great deal of our success during the second quarter can be attributed to the excellent support provided by our operations group.

On our last quarterly call, we spent time updating you on our brand strategies. Now I'd like to highlight some of our operational strategies that have begun to drive significant improvements in our system.

Over the past few months, operations has worked with our franchisees to take a close look at how each IHOP restaurant performs and how well each franchisee contributes to the overall health of our system. We have evaluated every restaurant in our system and identified those restaurants that we consider A or B operations. This will enable us to leverage and further develop our strongest operators, and help them improve upon the great job they're already doing. At the same time, we have also identified those restaurants that are not performing up to the top of our expectations. And encouraged those operators to improve by returning to the basics, and refocusing on training and service. And for those restaurants that continue to be a challenge, we will work to promote dramatic improvements or facilitate the removal of the owner or operator from our system.

A major mystery shop initiative began in the second quarter and while the majority of our system has received high scores, we obtained a lot of great feedback and we have identified several opportunities to improve service and hospitality. We uncovered additional ways to improve our guests' experience and we will continue to augment our operational and training programs to address them. Our franchisees responded well to this feedback and are now implementing many changes within their restaurants. We will continue our mystery shop program with six shops per restaurant per quarter for the foreseeable future.

We also launched an initiative to identify restaurants that could benefit from 24-hour operations. There are approximately 200 high potential locations where a shift of 24-hour operations would increase both profitability and comp growth opportunity for the franchisees. We have trained our field consultants on the 24-hour operating financial model.

Now, our efforts to move selected stores to 24-hour operations are in full swing. We expect to transition a good number of restaurants to 24-hour operations within the next year.

Enhanced training efforts continued with the rollout of Paradise Pancakes during the second quarter of 2003. More than 50,000 employees were trained on the promotion details and how to better greet and serve our guests, creating fabulous first and last impressions. In all, the operations group played an important role during the quarter and in making a great contribution as we work to become number one in family dining.

Another step to help us get to the number one position is our recent corporate reorganization. Announced just a few weeks ago the strategic reorganization of our company was designed to realign IHOP's corporate structure and resources to support the requirements of our new operating model. In turn, this has allowed us to devote greater resources toward marketing and operational improvements, which are critical growth drivers for IHOP going forward. We successfully implement our new business model, it was clear we had to make some changes and refine any processes. Our approach to the reorganization was comprehensive and affected all functional areas to set a foundation for growth in many years to come.

Now, the goal of our strategic reorganization was to create a corporate structure that facilitates the execution of our new business model, establishes the concept of IHOP's corporate offices as a restaurant support center and to reduce our overall cost base. Reducing our cost structure is a key benefit with steady state cost reductions of approximately $3 million per year. We accomplished this by identifying a plan to downsize and do away with functions designed to support the old business model. At the same time, we have focused on those functions that facilitate franchisees self-development and improve our ability to make IHOP restaurants successful. It is our goal over time to be recognized as world class in operations, marketing, and training.

Let me highlight the key decisions we made. Previously, managed under the same function, we will separate operations management of company and franchise restaurants. In doing so, we will be able to focus on improving the performance of company-operated restaurants.

Historically, company operations were comprised of restaurants that we took back from franchisees. These stores are often financially or operationally challenged and can produce a drag on earnings. We determined that our management group solely concentrates on improving company restaurant operations should be able to significantly increase sales and profits at these restaurants with the ultimate goal of making them re-franchiseable.

We will centralize franchisee support and troubleshooting by developing a cost effective operations call center at our corporate headquarters in Glendale, California. As a result we plan to replace seven regional offices with a strong centralized franchisee support center. However, more than 70 operations consultants will remain in the field to support franchisees on a daily basis, and provide the tools and guidance to ensure continued operational excellence. We will also consolidate and combine our franchise and development function into one department. The newly formed group will facilitate and monitor franchisee development at restaurants as well as recruit new franchisees, this effort will be led by Rick Celio, our current VP of Development. Anna Ulvan, our longtime V.P. of Franchise will be retiring at the end of September after more than 27 years with IHOP. Its been a personal pleasure working with Anna and we'll certainly miss her contribution. Anna successfully sold franchise restaurants under our old model and has played an integral role in driving IHOP growth.

With our new business model shift, Rick Celio has led our franchise development efforts since we changed our approach in January. With his extensive experience in franchising development I'm confident of Rick's ability to do this new job. Now, to reduce overall expenses and promote improved productivity and practices, we will combine and augment our franchise administration and property management functions, these activities will be led by Mark Weisberger, the VP and General Counsel.

Finally, we're a implementing several improvements in our finance function to create efficiencies. As the first step, we plan to out source the payroll function for both company restaurants and corporate employees.

Now before I turn the call over to Tom, I'd like to give you an update on our franchising activities. Our transition to franchise initiated development is proceeding well. As we announced earlier this week, we have 37 of our strongest single and multi-unit operators committed to developing approximately 130 new restaurants over the next five to ten years. These restaurants will be developed throughout the country. Our pipeline for additional franchise agreements is beginning to fill with approximately 40 solid prospects expressing an interest in developing at least 100 more new restaurants. We are extremely encouraged by the level of interest that we're seeing, and are confident of the successful transition to our new operating model. It's exciting to a great many of our existing franchisees decide to pursue self-financed development. It's a vote of confidence in our new operating model as well as an indication of the compelling return on investment that an IHOP franchise restaurant represents from those who know our business best, our franchisees.

As we said on previous calls, our research indicates there are approximately 400 to 800 more sites available for development under our new model. I'm confident in our ability to capture these development opportunities with both existing franchisees and prospective franchisees, new to the IHOP system. Now, with that I'd like to turn the call over to our CFO, Tom Conforti for a review of the numbers.

Thanks, Julia and good morning, everyone. We had a strong second quarter in 2003, which reflects our successful product promotions, and the positive impact of an improved operational approach in our restaurants. For the quarter, we reported an 18.3% increase in net income to $11 million, or an increase of 15.9% in diluted net earnings per share of 51 cents per share. This compares with the net income of $9.3 million or diluted net income per share of 44 cents in the second quarter of 2002. In addition our performance was impacted during the quarter by one-time charges of $811,000 or 2 cents per diluted share. That was associated with the reorganization efforts.

After accounting for these one-time charges, net income for the second quarter of 2003 increased 23.7% to $11 .5 million or 20.5% increase in diluted net income per share of 53 cents per share. For the six months ended June 30th, we reported an 11.5% decrease in net income to $16.9 million and a decrease of 13.3% in diluted net income per share to 78 cents per share in 2003. This compares with a net income of $19.1 million or a diluted net income per share of 90 cents per share in the same 2002 period. After accounting for one-time charges, net income for the first six months of 2003 actually increased 13.1% to $21.6 million or an 11.1% increase in diluted net income per share of $1 per share.

On our top line, total revenues for the quarter increased 21.7% to $103.3 million, and 18.6% to $197.3 million for the first six months of this year. This increase was driven by the strong comp source sales performance, Julia alluded to earlier, as well as the benefit of new restaurants franchised so far this year. Let me cover revenue and profit in bit more detail by touching on the four key reporting segments, franchise operations, rental operations, company operations and financing operations.

Revenue from franchise operations increased 15.9% to $34 .7 million for the second quarter and 14.2% to $68.5 million for the first six months of this year. This was due to a 16.7% and 15.3% improvement in retail sales and franchise restaurants for the quarter, and the six-month period. Retail sales improved due to an increase in the number of effective restaurants and average sales per effective restaurant. The number of effective franchise restaurants for the quarter ended at 919, a 10.2% increase over last year's second quarter. While over the six month period, effective restaurants were 911, and 9.9% increase over the same period last year. Average sales per effective restaurant increased 6.8% to $379,000 for the quarter and 5.5% to $754,000 dollars for the six months.

Franchise operations profit increased 14.7% to $18.8 million for the quarter and 13.8% to $37.1 million for the six-month period due to increases in effective restaurants and average sales per effective restaurant as well as a 4.8% and 3.6% increase in comp store sales at franchise restaurants. Rental operations revenue increased 18.7% to $29 million for the quarter and 18.4% to $57.3 million for the first half of this year. This was due to an increase in the number of franchise restaurants to 932 as well as an increase in the number of operating leases. Rental operations profit increased 23.9% to $7.7 million for the quarter and 19.6% to $15.2 million for the six month period. This was due to an increase in the number of operating leases, and increases in the amount of rental revenue derived from IHOP owned properties.

Moving on to company operations. Revenue increased 18.6% to $21.3 million for the quarter and 14.6% to $41 million for the first six months of this year. This revenue increase was due to an increase in the number of effective IHOP operated restaurants and an increase in average sales per IHOP operated restaurant. Effective IHOP operated restaurants increased to 79 from 75 during the quarter. And average sales per effective IHOP operated restaurants increased to 270,000 from 240,000 last year. For the six month period, effective IHOP operated restaurants increased to 77 from 74, an average sales per effective IHOP operated restaurant increased to $533,000 dollars from $483,000 last year. Company operations profit decreased to a negative $1.2 million for the quarter and was a negative $2.4 million in the first half of this year. For both periods this loss was impacted by higher costs associated with reacquired and newly opened IHOP operated restaurants and higher labor related costs. These higher labor costs were associated with the hiring of assistant managers at company-operated restaurants and higher employee benefit expenses associated with higher workers' comp rates.

Financing operation revenues increased 45.8% to $18.2 million for the quarter and 36.9% to $30.5 million for the six-month period. This was due to an increase in the number of IHOP- developed restaurants sold during the quarter and six month period. In total, five more franchises were sold in the second quarter than in second quarter 2002 for a total of 23. For the six-month period, 10 more franchises were sold than in 2002 for a total of 38 stores sold year-to-date. It also reflects the higher receivables balance for which we receive interest income. Financing operations profit increased 26.2% to $8.4 million in the first quarter ---in the quarter, an increase of 11.5% to $13.8 million in the first six months of this year due to an increase in the sale of IHOP developed restaurants.

Moving on to general and administrative expenses. GNA totaled $13 6 million for the quarter and $25.8 million for the six month period a 7.1% and 10.6% increase compared with the same periods last year. This was primarily due to normal increases in salaries and wages and additional costs associated with our new focus on marketing, operations, training and information technology. General and administrative expenses were 3.2% of system-wide sales during the quarter compared to 3.5% last year. As Julia mentioned, we implemented several strategic changes to our reorganization process. We expect the reorganization process to benefit us in several ways including reducing our overall cost basis. In steady state, we will experience GNA cost reductions of approximately $3 million per year. Total additional one-time reorganization costs are expected to be approximately $1.5 million with $1.3 million recognized during the remainder of 2003 and the difference being recognized in 2004.

Turning to our balance sheet. The balance of cash and cash equivalents at June 30, 2003 decreased to $53.7 million from $98.7 million at the end of last year principally due to the purchase of investment grade corporate bonds. The balance of profit and equipment increased 8.6% to $310.8 million from $286.2 million at the end of last year due to new restaurant development.

CAPEX, which included our portion of the 19 IHOP-developed restaurants opened during the quarter was $22.3 million. Long term receivables increased to $338.7 million from $332.8 million at the end of last year, due to IHOP's financing activities, associated with the sales of franchises and equipment.

Franchise fee notes totaled $46.9 million while equipment notes totaled $160.6 million. Our direct financing lease receivable was a $131.3 million. Long-term debt was a $144.7 million. Stockholders equity at the end of the quarter was $379.7 million versus $364.4 million at the end of 2002.

Turning to cash flow, we're improving our cash flow projections for fiscal 2003. We previously expected free cash flow to be in the range of a negative $25 million to a negative $35 million. However, during the second quarter, we benefited from a previously planned sale-leaseback of a group of IHOP restaurants with proceeds of $12.6 million. This deal reflected a pre-existing agreement on which we followed through and we don't anticipate any future activity on this front. As a result, we are increasing our free cash flow expectations for the year to between a negative $15 million and a negative $25 million.

On non-financial statement matters, we changed our methodology for calculating comparable store sales from a 12-month basis to an 18-month basis. We believe implementing an 18-month comparison period will enable a more accurate view of our system's performance by avoiding comparisons to initial sales levels, which are significantly higher than a unit's level ultimately settles.

In the news release we issued today, we have provided comp store sales dating back to 1999 using the 18-month methodology. If we were to reduce the 18-month methodology for our second quarter comp store figure we would have reported system-wide comparable store sales increases of 5.1% for the second quarter, and 4.1% for the six months ended June 30, 2003. Please note that the comp store sales numbers that Julia referenced for Stuffed French Toast and Paradise Pancake promotions were calculated on a 12-month basis.

Next, turning to development and franchising activity during the quarter, we opened 19 new restaurants primarily in the Midwest, rocky mountain and western regions. Of which 16 were IHOP developed and three were developed by franchisees. Our franchising activities included the sale of 19 IHOP developed restaurants; three restaurants developed under our franchisee finance program and we rehabilitated and re-franchised one restaurant during the quarter for a total of 23 restaurants franchised. We ended the quarter with a total of 1,136 IHOP restaurants nationwide and in Canada.

Consistent with our efforts to return cash to shareholders, on August 18, IHOP will pay the second quarterly cash dividend of 25 cents per common share to shareholders of record as of August 1, 2003. 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. Let me walk you through an outlook for 2003 before we take our questions. In view of the positive momentum in our business, we reiterate our guidance 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 approximately 20 franchise- developed restaurants for a total of between 75 and 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.

And as Tom just mentioned, we're improving our free cash flow expectations to fall within the range of negative $15 million to negative $25 million. We outlined a plan at the beginning of the year, which is now being tractioned. (071128-48%) are coming back more often and momentum is building as the growth strategy takes hold. We have a high degree of success ruling our business model and franchisees are anxious to develop their restaurants. We had great success with any products and marketing campaigns. Now we're raising our standards and developing expectations for excellence through our company. Recognizing that not all quarters will only be the best we had in ten years as is the case this quarter, we're confident with about our future and look for continued improvements in the second half of the year. With that, I would be pleased to answer any questions that you might have. Operator.

At this time, I'd like to remind everyone, if would you like to ask a question, please press "*" and the number one 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 C.L. Associates.

Hi. Good morning. Very nice quarter.

Thank you.

I guess I just had a couple of questions. The first question I have is regarding the guidance going forward. Obviously, the second quarter was a lot stronger than we were looking for and given the comparisons and relatively easy in the back half of the year and given the strong sales momentum you have seen coming into the third quarter, I was wondering why not raise that guidance. It would seem you would have to have very conservative, maybe too conservative same-store-sales assumption in the back half of the year, in order to not be above that range that you have guided to. I was just wondering if there was anything else there that you're seeing that leads you to not raise guidance or if it's just purely very conservative same-store-sales assumptions.

That's a fair question. I think we're very optimistic about the second half, but I think also we at this point would feel more comfortable sticking with our initial guidance of 155 to 170.

In terms of what your same-store-sales assumptions are in the back half that are embedded in that number, could you break that into a little more clarity?

You know, Mike, we have never shared our comp store number by quarter or certainly we have just said that we expect to do better than we did last year. We have obviously demonstrated that successfully, but I don't think we have ever shared an actual comp store number.

OK. Fair enough.

Yes. I just want to -

The second question I have is just as we get into 2004 and you switch over to the fully franchisee financed model, I was wondering in terms of -- I know you built up some backlog over the five to ten year period. I was wondering if we could get some more color on how the backlogs build - backlogs is building for 2004. How confident are you that you will make that 65 to 85 unit company, franchisee financed number and just sort of -- can you give us a little more comfort that, as we get into 2004, that you are going to be able to meet those numbers given the transition or significant transition to the franchisee developed model.

Mike, that's a great question. If you recall, we said in steady state, which is in 2005, we felt very comfortable we could get to the 65 to 85 number. 2004, is still not in steady state. So somewhere between the 65 and 85 number and where we are now, which is the 20-plus number is more realistic for the 2004. We will be able to share a little bit more light on that later in the year but steady state release is not achieved until 2005.

Are you saying -- coming back to that question, that for 2004 a 35- to 40-unit number might be more reasonable?

Yeah.

Mike, we haven't been specific on that, but our guidance has been exactly as Julia said. Somewhere in between what we're saying we'll do this year and what we believe we'll do in steady state.

And then based on that, would you still expect, if it is a 35- to 40 unit number, that your earnings per share in 2004, would you still expect that they would exceed 2003 numbers? I mean, obviously, 2003 you have had very strong same store sales results. I was wondering if you could give us even a beginning look at what you might be thinking as you look toward 2004.

Mike, what we said when we were presenting our operating models over the next five years that next year was the year of transition, that it was the year of transition in part because we were still going to be comparing against the old model. We were going to go from basically 60 company-operated units, company developed units to zero. That was a big EPS gap to make. Next year was going to be a positive year in terms of cash flow but the guidance that we have given, that EPS, if better than 2003 would only be modestly better than 2003. Next year was never intended to be a strong EPS growth year, but instead, an important year in transitioning from a negative free cash flow model to a positive free cash flow model and our guidance was flat to slightly up.

Great. Thanks a lot.

Thanks, Mike.

Your next question comes from Victor Holly with Reed Connor & Birdwell.

Hi, Victor.

Hi. Good morning.

Good morning.

I have a couple of questions, on the corporate bonds that you are buy, I want to make sure what type of duration and maturity of those. Are these really bonds or -?

These are very liquid instruments, Vic. We have complete liquidity. So, maybe the term bond was --you know, sent the wrong signal. These are just more -- these are 90-day, you know, 120-day maturities.

That was my impression. I wanted to make sure. Secondly, a lot of companies with the high employee count are complaining about the costs of health care and workers' comp. And I'm wondering are you taking any measures in the health of your franchisees, whether --how much it's impacting them, especially in states like California?

That's a great question. We have actually been trying to work with our franchise community to see if we might combine several of the franchisees to actually form, if you will, a partnership where we could lower their insurance rates by bring bringing them together. We have had mixed results thus far in working together with our organization to see if we could do that. But most of our franchisees today are not providing major health care benefits to their food server and back of the house employees. So, we haven't had the interest that perhaps you would have --we would have enjoyed of trying to combine their efforts. But I think as it becomes more competitive, and then the necessity is such that they may have to get into the benefits business, we'll be ready because we'll have done the pre-work in trying to consolidate them together in one organization. You can do that today. What you have to agree upon is the same rate. We have done the background work.

What about on the workers' comp side? Is anyone feeling any heat on the franchisee side?

We haven't had a lot of feedback in that regard to date. Everyone is saying, gosh, costs are up and it's more inflated, but I think nothing that is --you know - (Inaudible)

Thank you very much.

Your next comes with Dennis Joe with Sidoti & Company.

Good morning.

Good morning.

I wondered if you could quantify how sales are doing in the quarter to date and how the Super Stacker (Inaudible) what is doing so far?

We don't release results in the quarter. Needless to say, we are pleased with the results of Stackers and we have had positive feedback both from our guests and our franchisees about this wonderful new product line. So it's meeting your expectations and we're comfortable with our first real 48 on network advertising into the whole lunch lunch/dinner arena.

And then I was wondering if you could quantify how many franchisees are falling into category A and how many are falling into category B and then 4your announcement that you have signed on existing franchisees to build out. Are they mostly coming from the category A?

Oh, it's fair to say all --we don't allow any franchisee, maybe I should have said that previously and I apologize for that. No franchisee can develop in the new business model unless they are an A or B operator. We are only drawing from the A and B lines. The large majority of the franchisees fall into the A or B category. We do have some restaurants in that C category that we are working vehemently and effectively with to insure that they become an A or B. We have a very small, less than 2% group of franchisees that fall into that category I mentioned earlier that needs to dramatically improve or get out of the business. But it is safe to say in the large majority of the franchisees fall into that A or B category with a large majority of our restaurants falling into the A or B category, but we do have some of that C, what we call average or -- and average isn't good enough at IHOP. We're working to make them better.

OK and just one last question. The margin from franchise revenue, it looks like it fell a bit from second quarter last year despite the strong comps. Was there an increase in marketing expenses or what else was going on there?

Are you talking about profits per companies?

Yes.

For company restaurants or franchise restaurants?

The franchise expenses. Franchise revenue.

Is that for operations?

Right.

Yeah. You know, or margin on our product is -- on the proprietary product is lower than it was last year. That's probably the only -- as you know, it's -- there aren't a lot of costs associated with that, because we keep our GNA lines separate, but the margin on our -- our proprietary Pancake batters that come down just a little bit.

And how much was on the company side were marketing expenses?

There was an even distribution on the company side on marketing expenses. Increase of profit change in company stores had more to do as Tom side in his dialogue about the fact that we had increased the number of company stores that we brought in the fold. Some of them were financially challenged, if you will, from a previous ownership and we have really had to put additional labor and expenses into improving them, and then quite candidly, I added assistant managers to all of the company stores, and that did have a year-over-year impact.

OK.

Marketing had very little impact.

There was no -

On the company hops (ph) cost structure.

OK. Thank you.

Thanks.

Your next question comes from Arthur Roulac with Banc of America Securities

Hi, Arthur.

Hi guys. One question regarding the new 24-hour shift. Can you just give me a little color in terms of the number of units that might move to this format and the timing?

Yeah as I said, there's probably --we have identified, if you will, in the modeling that we have done about 200 potential restaurants that currently are not 24/7 that have the opportunity to go. That, of course, you do need to do additional work and effort to make that happen. There is some training involved with running your business 24/7. So, we are in the process as we speak of working with each of those individual operators to walk them through the modeling and the additional training to make certain they are ready to go 24/7. There's an up side. I'm not certain all 200 will go. It will probably take the balance of this year to get the large majority of those up and running because again, it is a mind shift, and you have to have additional staffing, labor. You have to make certain that you have a certified manager on all shifts. So, there's a fair amount of work involved. We do believe that between now and the end of the year, the large majority of those, we will be able to switch over to 24 hours.

In that segment in terms of the late night category, who are you sort of viewing as the chief competition you would be moving in on?

You know Arthur it's a great question and it really depends on where you are in the country. In the northeast, our, we're really competing against some of the diners who are 24/7. In the southeast, it's more --some of the cracker barrel and Bob Evans that might be 24/7 or Perkins in the west, it might be Denny's. Denny's probably has the stronghold on 24/7 out there. And so, but again, it really does depend on the area of the country. I would say overall, the person who has the largest number of restaurants 24/7 is Denny's.

OK. Great. Thank you very much.

You're welcome. Thank you.

Your next question comes from Mike Smith with Fahnstock.

Hello, Mike.

Hello Mike.

Well, Hi there. Couple of questions. On your compstessor (ph), any price change or is there -- ticket movement or is this all traffic?

We haven't really had seen any price increases from our franchise community or certainly in the company. We have really held the pricing, but I will tell you, it's not just traffic count. It is a mixture. Not on the actual promotional items, but it's interesting that the analysis we have done most recently says that people are coming in for let's say Paradise Pancakes but they actually might move over to something that's a higher price ticket item but it has more to do with mixture. We are not seeing anything in the pricing arena, which is really good news.

It is. On your franchising, I was pleased to see the announcement the other day, but I was kind of surprised that you weren't bringing in any new blood, I guess, so to speak. I was thinking that you were going to attract some more sophisticated areas of help or so. What's going on in that front?

Actually, we're pleasantly surprised that there was, as I think I said to you, there was lots of interested parties and prospective franchisees who were currently IHOP franchisees who want to grow. We still have a cadre of those folks, but there was this overwhelming interest from our existing franchisees and as you might well imagine, I much rather start out with my excising franchise base, people who know our standards who are friends of the family, who have been in the business for some time, that know the IHOP brand, can support it well. We have absolutely been blessed with this interest from our existing franchise base. So, first and foremost, I have been able to work with them and continue to do so. Before the end of the year, we will announce interested and prospective franchisees will become IHOP franchisees that are currently in other businesses. I think that the great news of the day, I was overwhelmed with the line that formed first and foremost with the existing franchises. It really should compliment to the business model and our brand that so many existing franchisees were able to have access to capital and grow.

And also to the economic return that their most --they're most familiar with. You know, Mike, some of the questions that come up about economic return, what better endorsement for the economic return that our concept provides than for the very people who know it best to run to rush to the head of the line to be the first to unclaimed areas, so we're encouraged by that.

I take it that all of the stores will be located roughly where you are right now, so you won't be attacking any new origin territory through that?

The large majorities are in existing markets. I would say you to we have a couple of un-chartered areas where you have got existing franchisees wanting to tackle that, or a new franchisee. You will see in the I would say next 12 to 24 months of probably -- will tackle some of the two or three sort of areas that are uncharted by IHOP you'll see its going into those areas. We have already gone into Ohio, which has been a win for us. But I think you will see in Minneapolis and the Dakotas, Vermont, the areas that we have not been strong in.

And Tom, I know you gave these figures, but I wasn't writing quick enough. Did you say that you hoped to have 65 to 85 franchise units --franchise developed units' open in 2004?

No, we always knew that was going to take time for us to do that, Mike and so when we put together our plan to do this new business model, we gave ourselves a running chance at it. We said 65 to 85 in 2005. But in 2004, we would be somewhere in between where we are now and the 65 to 85 number.

So, more like 40 next year?

Yeah. That's -- that's a good sort of arithmetic average. I would say that's pretty good.

Thanks.

You know, Mike, because it's franchise initiated, it isn't going to carry that big C that in the past our company had grown -- when we were developing our own restaurants.

You're not going to do any IHOP developed after this year, right?

That's correct.

You're only doing -

No, no, no. Let me change that. Julia has expressed in the past that an important part of our business going forward is to develop company cad -- a cadre of company restaurants in some market that we would dominate in the country.

But those are company stores. You're not going to do any franchise.

That's correct.

We might spend CAPEX money down the road on building a small cadre of company stores that I can look to and say, you know what, these are all A operations, they're run well and trained well they're marketed well and they're in this DMA or this specific area. We'll look to one or two of those in the future that we would just run and own as a company.

Is interest any geographic concentration on the company's 70 stores now?

I wish I could say there were. It's a smattering across the United States. The only two markets where I have got a preponderance of company stores really at Northwest and then in Detroit, other than that even in those areas I don't dominate the marketplace, I share it with the franchise community. As you know, our store profile was to get those restaurants back from franchisees, so it's really a smattering across the U.S.

Yeah. Thanks.

Thanks, Mike.

Your next question comes from Clive Munro with Javelin Research.

Hi, Clive.

Hello, folks.

Hi, Clive.

Well, the recent importance of my questions, Julia, in terms of IHOP company developed. Was it 55 to 60 or 55 to 65?

It was 55 to 60?

Looking at the move to 24 hours a day, what would be a typical expectation for increase in sales?

Boy it, really -- it is dramatically -- very much determined by where you are in the country, where you are if you are in suburbia, which a competitive set is. How many other competitors in the area are 24/7. We have seen as much as -- it's just been a very small increase to a very large increase. It really depends where you are.

Clive, if you think about it, we advocate this for our franchisees as a source of profit improvement because if you think about the motion of 24/7, you're taking that fixed cost element within the franchise operations, the rent, you know, you -

Yeah, so -- half of every dollar falls.

Yes. It's a much more profitable -

Yes. Let me ask the question a different way.

What would be the minimum that one would want to get to even make the decision to move?

Its typically would be a 10% to 15% increase. I would tell you, Clive, probably the strongest threshold to look at is virtually every restaurant in the Southwest region, which you know is sort of that Texas stronghold, virtually every restaurant in that region is either 24/2 or 24/7, and they have the highest volume of any of the restaurants in the country. Their average volume per store is the highest in the country. So, it gives you some sense or solace that really going to this does have dramatic impact on top line and boss tomorrow line.

24/2 is open on the weekends?

Yes.

Looking at G&A, which was a little over $13.5 million this quarter, which is about $54 million run rate and you're going to save $3 million in future years, so, would we be looking for a G&A number going forward of 61?

No. No. We said the $3 million save, Clyde, is a steady state save. It includes some of the steps that Julia detailed in her reorganization comments about closing down regional offices, which will save us money. That won't be done immediately. So, a way to look at it is for next -- I'm assuming your question is direct at next year. The way to look at it would be if you accept that 54 is the run rate and you assume that a portion of -- a good portion of that 3 will be saved next year, then you have to add back to that sort of normal increases in SG&A for next year. That's the way I that I would look at it. Salary increases and things like that.

So, what I would do, take 54 and add 3.5%, back away $3 million.

I wouldn't back I a way all 3 million, because we're not going to recognize all $3 million next year.

OK.

Clive, think of it in terms of stead any state 2005 this year as being the whole $3 million and adding back what I would call normal salary and benefit increases. And you have got sort of the net.

Where is G & A going to be next year?

We haven't decided on that.

We haven't got it yet. Towards the end of the year, Clive, we will guide that.

Are you filing your Q today?

Yes.

Great. That's all I have. Thank you much.

Thank you, Clive.

Your next question comes from Rick Foden with CMF Capital.

You talk about the compelling return on the investment for the restaurants for the Franchisees. Can you give us an outline of what that looks like in terms of average volume and margin and what kind of terms do they have with you in terms of franchise fees and royalties.

Let me take the top line and I want Tom to answer that. From a top line basis, we have obviously done a tremendous amount of work here to garner the actual P & L's from franchisees who have been building their restaurant in the last several years. Although that's a small group, we really have compelling evidence that we are right in the range with all of our key competitors both in fast food, casual dining and family dining in terms of the return on the investment. That's at 50,000 feet, if you will, in terms of the compelling argument, the work we have done. I think I have mentioned before, historically, the company has not completed balance sheets and P & L's from the existing franchisee. However on a go-forward basis, Tom has made that -- it's certainly part of the franchise agreement and Tom is now instituting the process in the systems to do that on a go-forward basis. On a top-line view, we are in the range, but let me have Tom answer that more.

You know, Rick, I'm not prepared to give more detail than what Julia has said. We have work to collect return -- financial information from those in our system who have developed previously. And that work is completed just recently, and I'm still digesting it, so I'm not prepared to show all of the details. But the top line that Julia shared is accurate, which is compared to what the stated profit cash on cash returns are with some of the other concepts out there, competitive concepts. We are comfortably within the same range of return.

What could you consider that range to be?

You know, it's 20% -plus return, cash on cash return. On EBITDA.

On EBITDA.

Did you also ask about the change or the sameness of the franchisees royalties and the like.

Right.

Those are standards of the 4.5% royalty will not change, the 2% national advertising and a total of 3, those will not change and those are steady states.

What's the up-front fee.

It's $50,000.

$40,000 for the multiunit, guys, $50,000 for a single investment.

One last question. I want to make sure that I understand. The guidance that you are giving on a full year basis includes the restructuring charge for '03.

Yes, It does.

The idea of '04 is going to be - sort of very roughly flat versus '03, it also uses the restructuring charges in '03.

It's comparative to the total number, including restructuring charges.

That's the reported basis. Thank you.

Thanks, Rick.

One or two more questions.

You have a follow-up question from Michael Gallo with C.L. Associates.

Hey, Mike.

Operated stores, I was wondering if we should continue to see those improve towards being at least break-even and what you might think your time table on that would be.

Mike, I think the first part of your question, we couldn't hear, could you repeat it?

Yes, I was wondering on the company-operated stores, in terms of, should we continue to see improvement in the profitability of that segment towards break-even? I was wondering what your timetable would be to get that segment towards -- towards being at least break even.

Well, certainly, we're going to work hard at improving the profitability, but as you might well imagine, if we continue to sell off company stores that are profitable, you know, we will be left with those that are, you know -- can be severely unprofitable. We're working very, very hard. What is the best Avenue for each of those stores that is remaining. I think as we work that process through the balance of this year and next year, we will be in a position to talk about what we might do with the stores. For the balance of this year, if you think about the company stores that we're going to sell, those are typically the ones that are just most profitable. Right now it's just too soon to quantify it. We have set up as you know, the management structure. It's going to take us the balance of this year, to work that through, but if you ask that question again in a couple quarters, I would be in a much better position to answer it.

Great. Thanks a lot.

Thank you.

Again, I would like to remind everyone if you would like to ask a question, please press "*" and then the number 1 on your telephone keypad at this time. We're still pausing to compile the Q & A roster. Your next question comes from Dennis Fall with Adage Capital (ph).

That's actually company Adage Capital. I had a question on the Sandwich Stackers. You mentioned that you're happy with the recent -- it's been actually successful. Could you comment on the profile of the customer. Is it the same? I'm wondering, is this the same customer as is your breakfast customer, or is this something different?

Denies, it's a great question. The good news is, we compete very much within the family-dining segment. In the lunch and dinner arena, we are not stealing share, if you will from casual dining or fast food. These are people who eat in the family dining category with our competitors, and they are either currently eating with us, or with dining with somebody else in the family dining, but these sandwiches have attracted both existing lunch and dinner customers of IHOP as well as the competitive set to try them. It's a wide range of guests -- a wide range of profile and demographics. But it truly is from the existing family dining category. It's typically people who eat lunch or dinner at another family dining restaurant who have chosen to come to IHOP and try this unique set of sandwiches.

Great, thank you and also, if you could comment how you count repeat traffic business? You said that traffic was building at breakfast or that you did have repeat customer, I think.

Well, the franchise community is well as our company stores track guest count by the guest check. So, how many people were on a guest check. So, if there were two people who ate lunch, that's considered, you know, two people eating on a guest check, and if in fact you view it next week and there are four people, so, you -- you're increasing your guest check, you are increasing the number of guests visiting the restaurant. It's actual foot count. You have a separate check for the actual average check. But you -- the issue that we have is we have not historically been able to poll all of the restaurants, which is what Tom has mentioned that he had been working on in the I.T. technology arena where how we track over time all of the restaurants. Right now, it's a sampling that we take from our company store base and our franchise store base to see the increase in and a guest check as well as customer count.

Great.

Thank you.

Thank you.

At this time, there are no further questions. Miss Julia Stewart, are there closing remarks?

Operator, I just want to say thanks and thanks to all of you for joining us. We look forward to next quarter. Thanks again for the questions.

Thank you for participating in today's teleconference. You may now disconnect.