Dine Brands Global Inc (DIN) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to Applebee's International third quarter release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone requires assistance, press star, then zero on the touch-tone telephone. As a reminder ladies and gentlemen, this call is being recorded. I would now like to introduce our host of today's conference call, Ms. Carol DiRaimo. Please go ahead, ma'am.

Good morning and thank you for joining Applebee's third-quarter 2003 conference call. This call is being broadcast simultaneously over the internet.

A couple of calendar items to note. Comparable sales for the November fiscal period, which ends November 23, will be released on Monday, December 1. So, you can all leave early to enjoy the Thanksgiving holiday. Thanksgiving occurs in the December fiscal period, as it did last year. There is no mismatch in this period. However, November sales will be negatively impacted by Halloween moving from Thursday last year to Friday this year.

As we continue with our remarks, many of the statements we are about to make with respect to our business outlook including comparable sales increases, costs, earnings per share growth, and new restaurant development, are forward looking and based on current expectations. There are several risks and uncertainties that could cause actual results to differ materially from those described, including but not limited to, the ability of the company and our franchisees to open and operate additional restaurants profitably, the ability of our franchisees to obtain financing, the continued growth of our franchisees, and our ability to attract and obtain qualified franchisees, the impact of intense competition in the casual dining segment of the restaurant industry and our ability to control restaurant operating costs, which are impacted by market changes, minimum wage and other employment laws, food costs, and inflation. You should review the form 8-k filed with the SEC June 12, 2003, for information about factors that could cause actual results or events to be materially different.

In addition, in our comments, we will use some figures that may be considered non-GAAP financial measures under Regulation G. These are systemwide sales, which include sales at all company and franchise Applebee's restaurants as reported by franchisees, net income and earnings per share, excluding an impairment charge resulting from fully reserving net receivables from Chevys, related to the Rio Bravo concept in 1999. I refer you to our third-quarter press release under the investor relations section of our website, which includes directly comparable figures calculated in accordance with GAAP and the reconciliation of non-GAAP financial measures to GAAP results.

With all that, I'll turn it over to Lloyd Hill, Chairman and CEO.

Thanks, Carol. Good morning, everyone. With Carol and I this morning are Steve Lumpkin, CFO, Dave Goebel, our Executive Vice President of Operations, and John Cywinski, Chief Marketing Officer. As I look around this table, all of us are smiling. As a matter of fact, might be a grin.

To start, I would like to highlight some of our outstanding third-quarter results. Now, the momentum we've got is evident. But I think the notable thing here is our momentum continued to grow during the third quarter. Our results continued to be driven by the execution of the strategies that we've articulated for so long now. Specifically, I'm talking about our improved food, our compelling promotions, our effective advertising, convenience, our focus on operations excellence, and retention of terrific people. And I know that sounds easy, but the reality is that the coordination and the orchestration and the execution in our business is exceedingly challenging.

While as a result of all of that and, as you know from our press release, diluted EPS for the third quarter increased 21% to 45 cents that is compared to 37 cents last year. While I'm going to call it our industry-leading return on equity, it was over 23% and both of those, significantly, surpassed our long-term targets, our EPS growth and return on equity, our own internal target.

Let me now make a few comments about our sales performance. Comparable sales growth, particularly in September and October, substantially exceeded our own expectations and that despite difficult comparisons. The last two months we've seen a significant acceleration in these trends. These are the strongest numbers we've run since 1999, and that with far greater penetration.

Systemwide the comparable sales increased by 4.8% for the quarter. That's the 21st consecutive quarter growth for us. Comparable sales for company restaurants were even stronger, increasing 5.9%, with traffic up 3% of that quarter. And that's compared to negative traffic experienced by the casual dining sector.

Then we close the quarter on a very strong note with September comparable sales for company restaurants increasing 6.7%, and traffic was 5.5% of that. And that's on top of similar traffic last year. Just let me say that another way. September was our highest total of this year. Systemwide comparable sales increased 5.9% for the September period.

And then the fourth quarter is off to a really strong start, with October comparable sales up, I'm going to call it a remarkable 7.3% in company restaurant. That includes the traffic component of 4.5% to 5%, systemwide comparable sales up 6.7%. Well, the remainder of this year is all about executing our strategies and then preparing to jump start '04.

Now, just a couple of points, a couple of highlights from our annual franchise business meeting, which we held a few weeks ago. At that meeting we did a lot of things, but we celebrated the achievements of our franchise partners with the recognition of our top performers. We had 150 franchise restaurants that exceeded the $3 million annual sales level. I can remember when that was about 12 restaurants that surpassed $3 million. And those restaurants were led by our Times Square, New York, location, which had record sales of almost $11 million in the last 12 months. I think importantly, that's against $8.5 million for the comparable period last year for that restaurant. I think it's fair to say our franchisees are unified and really enthusiastic about our plans, about our momentum and about the improvements we've made in all aspects of this concept.

In closing our strategies and our focus are translating into industry-leading results and the investments we've made in the business over the past few years, well, they're paying off. As we head into a new year, there are three primary catalysts for sales growth which will be driven by noticeably better people executing in a noticeably better way. And Dave and John will cover those three catalysts as they comment on the results.

With that, Dave, I'll turn it over to you.

Thank you, Lloyd. Good morning to everyone. I'd like to take a moment and highlight some of the things we've been up to in operations. Our operations team remains very focused on improving the guest experience and driving increased loyalty with our Applebee's guests. We know from our research that with Applebee's there are six primary drivers of customer loyalty. Four of the six drivers deal with convenience. And it's for that reason that our convenience initiatives have been given top priority by our operators and our functional support teams.

You know, we've also been analyzing the total guest experience, looking for efficiencies. Compared to 2002, we've decreased table-turn times by 13% in company restaurants and increased revenue capacity, correspondingly, through a number of dining room and kitchen enhancements. Not only has this provided a revenue boost at peak periods, every one of our key indicators from our customer satisfaction measures around convenience have improved significantly. There's clear evidence that the customers notice the difference.

The implementation of KDS or our kitchen display system, as we indicated to you before, has been a significant part of this improvement. We completed all of our company restaurants in July and we are now working with each of our 50 franchise groups to plan for implementation of KDS in their restaurants. I'll tell you what, they're lining up for this one, and they're anxious to implement this tool. That's based on the results we've shared with them around guest satisfaction, primarily faster and hotter food, as well as the incremental revenue opportunities. We've managed the cost for KDS down to less than $7,000 a restaurant, and we're experiencing very quick return on that investment.

Now let's move on to Car Side. Our Car Side To Go initiative is heating up and it's catering right to the hearts of our guests' desire for greater convenience. At the end of Q3, we had over 450 restaurants on Car Side, 235 company and approximately 215 franchise restaurants. Our mix of sales in Q3 was 6.9% versus 4.9% in Q3 of '02. Now, there are two important things that are noteworthy here. One, the absolute dollars of to-go sales in company restaurants have increased by over $1,000 per week since Q3 of last year. Accounting for over 40% of our 5.9% comp growth during the quarter. Secondly, our comprehensive, disciplined training rollout is complete in only seven of our 11 company regions at this point. I'll tell you what, company and franchise Car Side is on fire, and we are clearly gaining momentum.

Company restaurants were over 7% in September and just shy of 8% in October. And all of this is in advance of any significant media support. We recently begun local support in Kansas City and Richmond and we are very pleased with the results. As an example, the Kansas City and Richmond and we are very pleased with the results. As an example, the Kansas City market completed Car Side implementation was completed in August and quickly climbed to about an 8% mix. We introduced local media support in late September and since then, the 27 Applebee's in that market are averaging north of 10%.

We had one additional media test market in Q4. And the reason for that is to further measure our growth potential and equally as importantly to fine-tune our operational best practices so we can share them with the rest of the system. All company restaurants will be complete in the next three to four weeks, and franchise rollout will continue throughout 2003 and into mid 2004. We look to '04, I'll call it early '04 to turn on local media in all company markets, and we remain prepared to flex our muscle with network Car Side To Go advertising sometime in 2004.

So in summary, we're more than just a little excited about continuing to make an Applebee's experience more convenient for our guests. We've established a strong foundation on which to build, and we will continue to drive very hard to deliver great execution against all these initiatives.

So with that, I'm going to give it to you, John.

Thanks, Dave. And good morning, folks. I'd like to briefly highlight three subjects before turning it to Steve. First, a recap of our recent marketing activity. Second, a progress report on the evolution of our menu. And third, an update on our new Weight Watchers initiative.

Let's start with marketing. Where our food and music advertising has now been in place for more than a year and a half. We're pleased to announce that Applebee's TV ad awareness hit another all-time high in September. Now this performance is the result of not only our compelling advertising, but also a terrific media strategy, and a series of signature promotional events that our guests simply love. In particular, our marketing team headed up by Randy Davis and Nancy Culbertson, really deserve a lot credit for putting together a truly outstanding plan.

Now, back in July, we started the quarter with our Tasty Barbecue Fever summer event, we followed that with the successful All You Can Eat Rib-tip promotion, which concluded September 21st and we’re currently in the midst of our popular Take Two promotion, which will close in early November. In fact, this variety-based promotion has been so successful in the past that we've decided to make it a permanent part of our core menu.

Now this core menu which was introduced in late September features several newer improved products such as our appetizer sampler, honey-barbecue wings, crispy buttermilk shrimp, chicken parmesan, and the absolutely delicious triple-chocolate meltdown dessert. You've got to give that a try if you haven't already. And that's in addition to the Take Two section that I just mentioned.

Over the past two years, 75% of our menu is either new or improved. We're certainly proud of this accomplishment, and the fact that overall guest satisfaction with our menu has improved significantly during this timeframe. And we as a team would like to take a moment to recognize Kurt Hankins, Jim Doke, and the entire menu team for their impact on the business. With this foundational work now in place, we'll continue to focus on menu innovation and the evolution on about a twice-a-year basis.

Now, a great example of this innovation is our co-branded alliance with Weight Watchers. By the end of November, we'll be active in five test markets. Those markets are Buffalo, New York, Providence, Rhode Island, Birmingham, Alabama, Portland, Oregon, and Kansas City. And that represents about 70 restaurants in total. Our test goal is to identify the best way to position this initiative for a national rollout sometime in the back half of '04. Suffice it to say we'll deliver a portfolio of great-tasting appetizers, entrees and desserts at a superior Applebee's value.

From our perspective, it's all about providing choice for our guests. Whether they choose to enjoy their familiar favorites or the new Weight Watchers menu, Applebee's will satisfy their needs as America's favorite neighbor. With more than 75% of the adult U.S. population identified as either health or weight conscious, we believe Weight Watchers broadens our reach and appeal and makes us even more relevant in today's environment. And while we have yet to quantify the impact on traffic and sales, our test markets provide us an opportunity to validate this premise and we'll certainly keep you posted along the way.

In closing, our 2004 plans are set. Our media has been purchased. We're now developing 2005 strategies for accelerated growth. Needless to say, we remain confident and enthusiastic.

With that, I'll turn it to Steve.

Hey, John, thanks. Good morning,everybody and as always, thanks for your interest and support of the company.

Let's take a quick look at the numbers and then I'll close with an update and outlook for the remainder of the year with a focus on some things we need to think about as we close out the year end fourth quarter. Now the company sales, company sales were up overall 21.7% to $222 million. That was driven by very strong comps of 5.9% as we talked about, and a capacity increase of 16%.

Now this capacity increase was due to the impact of the acquisitions that we talked about before on this call that we've made in the last year and the opening of 22 company restaurants in the last 12 months. And that includes 15 new company stores through September. This equates to a 7% organic unit growth. Now, this increase in capacity was partially offset by the sale of eight restaurants to our Atlanta franchisee, and that sale closed the third week in July.

Now the franchise royalties and fees, there up 6% to $27.6 million, driven by strong franchise comps of 4.4% and 72 openings in the last 12 months. And that includes 41 new restaurants open through September of this year. This represents normalized capacity growth of over 6%, and that excludes the impact of franchise acquisitions and dispositions.

Other franchise income moving down the P & L totaled $3 million. The Lions share of that relates to our insurance captive, and with a small amount being related to technology services, provided to our franchisees. Now, as we discussed before, this other franchise income line is really offset dollar for dollar in the expense section of our P & L resulting in no material impact on the reported earnings.

Total revenues for the quarter were $253 million, and that's up 21%, including the captive 20% without. Systemwide sales came in at $910 million for the quarter. That's up 11% driven by strong systemwide comps of 4-8 and a 6.5% capacity growth with 94 new restaurants open in the last 12 months.

Now let's turn our attention to net income. That came in at $25.6 million and that's up nearly 22% versus last year. As Lloyd outlined, diluted EPS, up 21%, came in at 45 cents a share versus 37 last year.

Now, let's do a quick dive into some important parts of the P & L. Restaurant margin before pre-opening came in at 63, very pleased with that. That was 100 basis points improvement over the last year.

As we go down, look at food cost, usage came in at 25.7 for the quarter. That's a 40-basis-point improvement. And we continue as we have for many quarters now to benefit from our supply chain initiative and the modest price increase we took last January. Now, I know many of you have got questions on the state of the beef market. And I'm going to update you on that hot topic in just a moment.

Labor overall came in at 32.8%. That was down 10 basis points in total. We did get 90 basis points of leverage from these higher sales. However, this leverage was offset by the addition of dedicated To Go labor during the quarter, which was about 40 basis points, as we significantly ramped up the number of company restaurants and made the labor investment to get our service just right in Car Side. This expense will normalize in 2004 after we complete the rollout.

We also experienced higher bonus, management bonus expense in the quarter due to the great sales performance and that was about 30 basis points. And we have workers compensation costs of about 10. Management wage rates were up approximately 3% to 4%, reflecting our excellent management retention while hourly rates were up 1% to 2%.

Now, moving down to D&O. D&O was down approximately 60 basis points to 25.1, due primarily to some nice leverage we got in depreciation. That was up 30 basis points. And timing on advertising, advertising expense was down 30 basis points, really due to the timing of our promotions and our media buy. I'll speak to advertising in a moment. However, you can expect that if this timing benefit is going to go the other way in the fourth quarter by similar amount.

Offsetting this favorable treatment here at D&O were To Go packaging, that was up 10 basis points, and property and liability insurance, which was up 40 basis points. We have lots of little items added up to the remaining bit of leverage we got up this line.

Now the G&A, G&A came in at 9.3%. This line showed good leverage, down 30 basis points and in line with where we thought it would be. Tax rate 36%. That's down 50 basis points from last year. Our full-year rate, we continue to expect to be at 36%.

Now, real quickly, go through the balance sheet here. Cash investments of $3.4 million. Debt at $29 million. We did pay down $6 million of debt in the quarter. Actual shares out are $54.9 million. Modest debt-to-cap of 6.2%.

We were active in repurchasing our stock here in the quarter. We repurchased approximately 1.1 million shares at an average price of $32.15. And that came at an aggregate cost of north of 36 million. And we've got almost 20 million left under our remaining authorization, and year-to-date that brings our stock repurchase to nearly $50 million at an average price that's less than $30.

Now, I think it's important just to reiterate the balance sheet does have a couple items related to the captive insurance company. On the asset side, we've got premium receivables of $2 million. And a new line on the balance sheet this quarter, restricted assets of about $8.8 million. These are primarily investments that were holding in the insurance captive for payment of claims in the future. And we've got $1.4 million in deferred policy acquisition costs. That's just costs that we've deferred here as we purchase the policies for the captive beginning of the end of the year.

On the liability side, we've got accrued liabilities in the amount of $11.9 million. And this relates substantially to unearned premiums and loss reserves for future liabilities.

Now as to the guidance for the remainder of the year, I'm not going to regurgitate everything that we affirmed in the press release. Let's just say the remainder of '03 is all about executing our strategies as we've talked about this morning. You'll note that we've raised our systemwide comp sales expectation to the range of 3.5% to 4% for the full year.

Now, add the EPS, we've increased our full-year expectation to be in the range of $1.73 to $1.75. Of course, that excludes the 10-cent charge we took on the Chevys' note and excludes the impact of any additional franchise acquisitions or share repurchase. At the beginning of the year, we expected full-year EPS to be in the range of $1.65 to $1.67.

Before we open it up for questions, let's review some important considerations as we contemplate the fourth quarter. First, regarding beef, our supply chain team has been working on a long-term commitment for our steak products. We're happy to announce that we've been able to lock in steak pricing for the next 12 months, at only a 4% to 5% increase. This gets us effectively back to 2002 pricing levels, and as a result of renegotiating our existing contract ahead of schedule, we'll see slightly higher beef costs in Q4. Let's say the impact will be approximately 10 to 20 basis points as we plan to sell a lot of steak in our final promotion of the year.

Now as to advertising, as we discussed, for most of the year, you can expect that advertising expense will be unfavorable versus prior year for our last quarter. Expect the favorable advertising we experienced this quarter to reverse itself in Q4. Overall ad spending for the full year is going to be in line with previous trends.

Now to go labor, really leveraging off of what Dave said about the excellence we're driving at To Go, we're going to continue to see incremental To Go labor as we complete the company roll out. This investment is clearly paying off. We're pleased with the results. These costs will normalize in 2004. We're committed to this investment in Q4 at a similar level that we saw in this past quarter.

Now as a manager bonus, with the level of company sales growth you saw in October, you can expect restaurant manager bonuses are going to continue to run higher. That's just great news for the field organization, we think.

And finally as we head into '04, it's important for us to reinforce the structural advantage of our franchising business and our broad menu. These two key elements of our business model provide a built-in buffer against the impact of potential commodity increases. We did not take any pricing in our new September menu, and we won't be taking any pricing for the remainder of this year. We believe that we have pricing power as we contemplate our 2004 strategies.

With regard to '04 expectations, we're closing up here our business-planning process, and we expect to give detailed guidance about ‘04 sometime in January. Now, Jonathan, let's open it up for q and a.

Thank you. Ladies and gentlemen if you have a question at this time, please press the 1 key on your touch tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. If you are on a speaker phone, please pick up the handset before asking your question. One moment.

Our first question comes from Glen Guard from Legg Mason.

Hi. Thanks a lot. Great quarter. A couple of questions, I'll start with one. I believe on the call you just said that media rate increases or, excuse me, media rates are locked in for '04, is that correct?

I'm sorry, what's your first name again?

Glen.

Glen, this is John and that is accurate. We have locked in on '04 with the exception of some sports programming.

Okay. And can we assume based on what we've seen with other companies that this is an increased cost for you guys?

As we outlined on the last call, we ended up in a very favorable position relative to the double-digit increase that the industry is experiencing. That will be in the high single digits.

Okay. Great. Thanks a lot.

You bet. Thanks, Glen.

Thank you. Our next question comes from Joe Buckley from Bear Stearns.

Thank you. A couple of questions. First on the advertising, I know the advertising spend goes back up in the fourth quarter. Could you fill us in on weeks you'll be on the air versus this fourth quarter versus last fourth quarter. Was there a favorable mismatch there?

Yeah. Joe, this is John again. We're favorable by a week or two. In fourth quarter.

Okay. Was October one of those months when you were favorable?

No, Joe, it's David. It was not. I think as we've talked about, you know, we really have been anticipating the impact we want to have here in the fourth quarter. So I think you're going to see us very prominently on the television set here as we close out the year.

Yes.

And then a question on To Go, as you roll it out with the incremental labor, any new wrinkles there in terms of the labor that's involved and I know we've talked before about the server position for the To Go, you know, possibly being one of the more lucrative in the stores over time. I’m curious if it's reached that status yet or if you're still thinking it will reach that status over time.

Joe, this is Dave. As you recall in phase one, most of our To Go was facilitated by our bartender. With the rollout of Car Side is where we went to the dedicated Car Sideserver..

You asked the question about learnings. The learnings are occurring every week as we see the volume continue to ramp up. And we're typically debriefing every Monday morning from our higher volume restaurants to say what did we learn, when did we add another Car Side person, how are we handling the kitchen, and so forth. This issue of normalizing in '04, if you just think about it for a moment, in the early stages, we don't have all of the efficiencies and effectiveness from a new Car Sideserver, just like we don't have from a new dining room server their first week. We're continuing to see improvement there.

I think the other thing is these stores ramp up, Joe. The thing we're finding is, let's take a two-hour period from 5:00 to 7:00 on a Friday night, a single Car Side server can clearly handle 20, 25 transactions, whereas the business grows, that same server can handle35-40 transactions. So, the good news is we're ramping up and the good news is we're learning with that ramping as we go.

The additional labor for the To Go, is it basically a dedicated server and a telephone person?

No. That's one and the same person. So the dedicated Car Side person is the person that first and foremost dives for that phone when it rings.

Okay. Then one more question. On the To Go, the, you know, the mix is up slightly on a sequential basis. You know, granted a much higher averaging of volumes, not quite as dramatically or significantly as I might have thought. I'm just curious if you could talk a little bit about that and give some anecdotal data on some of the Car Side markets. Can you just talk a little about that mix and what might be reasonable to expect going forward.

I think John and I will double-team that for you, Joe. Let me first of all, in terms of the mix coming out of Q3, as I said earlier, of course, part of that is derived from tide, even from the first of the year, I quoted $1,000 over Q3 of '02, but it's up 450 bucks from the first of the year in the average company restaurant. The other thing to keep in mind is, as you know, during Q2 and Q3, we were in fairly heavy design phase. The implementation really got heavily under way when we got to about August-September. John, you want to add something to that?

Yes. Joe, I think it's important to recognize that phase one, which was the bulk of this past 12 months, was not really a significant, new, meaningful benefit for guests. It was certainly an improvement. Car Side, on the other hand, where we bring it out to their car, is a very meaningful benefit.

We from an advertising perspective, we really took a hiatus starting in September as these markets are converting. And keep in mind that we have only now converted three of those markets with advertising support just starting. The full benefit of the consumer awareness around this conversion comes in first quarter. So, there's a lot of dry powder sitting there.

Okay. Thank you.

You bet, Joe.

Thank you. Our next question comes from Bob Derrington from Morgan Keegan.

Yeah. John, could you give us a little bit more color on the Weight Watchers program, and some items. Have you done much in the way of testing either on your franchisees and, you know, we're trying to get a sense on, you know, kind of an expectation to come.

Yeah, Bob. Certainly. First off, the franchise community, the entire community, is so enthusiastic around this initiative. Our partners at Weight Watchers have just been terrific, as we've evolved here.

You can expect as you happen to one of these markets somewhere in the neighborhood of 11 menu items, combination of appetizers, entrees, desserts. They will be all designated with Weight Watchers flex points, probably a range of 2 to 10 points, if you're familiar with the system, per menu item. We're testing a variety of foods, a total of 18, although on any one individual menu you'll see 11. And over the next several months, we'll assess that performance. We'll gain a great deal of insight, and with all of that learning, we'll appropriately move forward to national launch at some point in the back half of the year. What else are you looking for there, Bob?

The timing of it, obviously, you know, going into the, you know, 70 restaurants in, you know, mid November, I'm wondering if you've seen much or gotten much feedback either from the Weight Watchers people or from participants or any kind of anticipation about the program.

Well, Bob, we are not in market yet. I can tell you, we can tell you as a team, having eaten this food and better yet, we've shared this through focused groups, through an iterative process with Weight Watchers members, with Weight Watchers leaders, that passion and enthusiasm goes well beyond the Applebee's system here. Those guests who have tried this food love it.

Bob, it's Dave. I just wanted to I think punctuate a couple of things without overdoing it too much. I think, you know, you've certainly heard Carol and I speak the last two months about the strategy here and the management team and franchise community is way behind it in strategy.

You know, however, we don't have any verifiable results. And I think as excited as we are, I think after we get these 70 stores in and we get to read data for three months, we're going to know about true incrementality, incremental traffic, the impact on check and margin. We'll be able to measure revisit intent. All of the key consumer dynamics that we've got to be able to describe are ahead of us. I think in the spirit of full disclosure for this audience, we need to say that.

So the pricing and the cost profile of these items are expected to be similar to the rest of the menu?

Yes.

Okay. All right. Terrific. Thanks, guys.

Thanks, Bob.

Thank you. Our next question comes from Janice Meyer from Credit Suisse First Boston.

Thank you. Two questions if you don't mind. One is just actually a followup to the second-quarter conference call. Actually, I think that at that time that the ad spending would be unfavorable in the second half of this year. So I was wondering if something changed or if I just misunderstood that then.

And secondly, I was wondering if you can explain a little how you were able to keep the beef increase so low. Did you, you know, limit the number of suppliers and guarantee more, you know, more purchases? What allowed you to do that? And given that beef, even though up modestly, next year is going to be up a little, are you going to change at all kind of the weighting you give to steak promotions in 2004 versus what you did in 2003?

Yeah. Janice, it's Steve. I'll take that and I'll kind of go in reverse order. I think our whole marketing focus is consumer driven and so our people love steak. And we're not going to do things like, you know, deny them the ability to buy great steak at Applebee's. In fact, I think we'll be selling a lot of steaks here in our final promotion this year. So we don't see that as really a viable consumer proposition.

With regard to the ad spin, your first question, I think, Janice, you did not misunderstand, we weren't as precise mid year because we were, quite frankly, still seeing how we were going to flex the media spend, and the impact. And also, you know, we are doing some investment here on To Go advertising that has been pushed primarily into the third quarter, you know, fourth quarter into company restaurants.

Now, with regard to the beef buy, I think without giving away too much, we've got great suppliers, great partnerships with those suppliers. And like we did last year, we moved early into the marketplace with our suppliers, and their support, making commitments months ago. And I think we're the beneficiaries of that. So we're pleased that we've got those kind of relationships and pleased that we can, you know, bring these kind of results for the next 12 months, only 4% to 5% up in a tough market.

Right. Thanks so much.

You bet.

Thank you. Our next question comes from Andrew Barish of Banc of America Securities.

Hi. One more on the cost side , I guess 3Q and 4Q. I assume the rib-tip promotion was a favorable item for food costs in the third quarter. So, I’m just trying to get a sense of what you said on food costs being up 10 to 20 basis points with steak and something you'll be selling a lot of. Is that versus 3Q versus a year ago? Can you clarify?

Yeah, rib tips were a very cost-friendly promotion for us. I won't dimensionalize that in total. I think, you know, you do have, we're currently this Take Two, and Take Two is an inherently higher food cost campaign. And we will be featuring more steaks here in our final promotion. And that will have some benefit of product. We have an inventory in our current-year price. It will also have our new contract which will kick in also. So the 10 to 20 was really, Andy, more a reflection of the impact on beef and some of the mixed changes here in quarter.

And were there any costs in the third quarter with the new menu rollout that were noticeable, either training or waste or just kind of in line with what you thought?

No. I mean other than a normal menu reprint, which is in our numbers quarter over quarter, you know. We're nothing unusual.

Thanks.

Thank you. Our next question comes from Peter Oakes from U.S. Bancorps Piper Jaffray.

Good morning.

Hi, Steve. I have a couple of questions as you clearly are taking your business to the next level. A couple of questions about potential capacity bottlenecks. You had mentioned that there's 150 units doing three million or more AV, obviously well above the system. I'd be curious if those units are producing comps comparable to the system, which obviously would show some evidence as far as capacity growth opportunities, obviously for elsewhere in the system.

Then secondly, I think it was Dave who had mentioned that the table turns were up 13%. Maybe sliced a little bit differently there. Peak-hour performance, are you able to measure that and if you are, are you seeing comp gains similar to what you're seeing with the system or the table-turn improvements really occurring more kind of off-peak hours? Thanks.

Yeah. I'm going to try to take the first one. Peter, I wish I could tell you how those 150 franchise units over three million are comping here in the quarter. They're comping well, I can't say precisely. are they doing better than the system. So I won't give an answer on that. I don't know it at the tip of my finger. I will tell you there the150 doesn't include the $3 million company stores. You've got more there.

I think our sense here is that the larger volume stores are in, we have an experience with our own kitchen display system in the higher volume stores than at peak we were able to do more volume in terms of dollars per hour. And I think that probably was the intent of your second question.

Dave, you want to talk about table turns at peak and how are we doing? Are we seeing those gains only at peak or does it also help off peak?

Yeah. That 13%, Peter, we referred to, a lot of the benefit of that is coming at peak times. So let's take that three-hour period on a Thursday, Friday, Saturday night when the customers are out. A 13% reduction in table turns buys us six or seven minutes per turn. And what that does to allow us to put more people through the restaurant during that peak period is significant.

Now, it's also benefiting us, I think, in off times. You know, we've talked a lot about KDS. We've talked about KDS in the context of what it's doing for guests in terms of hotter and faster food. In terms of what it's doing ticket times coming out of the kitchen. So clearly, there's a benefit both at peak, but I think there's a long-term residual benefit in nonpeak there, as well, because of the guest satisfaction measure coming out of there.

So we continue to plow into all those efficiencies around peak periods. You know to that opening question regarding franchisees that are driving big per store sales numbers, again, to Steve's point, we don't have the specifics on those. But it's clear that our franchisees with the higher volume stores are driving very high-volume comps, as well as we are. So the bottom line is there's still capacity even in our $3 million and $4 million restaurants we believe.

Peter, this John. What those $3 million-plus restaurants do for us, and they're performing well, is they illustrate the capacity. We've got it at lunch, in the afternoon, dinner, late night, and to go. It just illustrates the growth potential here. It's essentially the same restaurant, just pumping through significant volume.

Okay, thanks, gentlemen.

Operator, let's take one more question, and then we'll close our conference.

Certainly, sir. Our final question comes from John Glass from CIBC World Markets.

Yes. Can you talk first of all I guess about the menu development. It sounded like the September menu rollout was your last significant change. And from here on, it's maybe more tweaks and fewer new items. Is that an accurate description of how that's going to change?

John this is John also. Let me clarify. We are big believers in continuous evolution, continuous innovation. As to whether that's five menu items or 10 menu items per reprint, we will be reprinting about twice a year. There were a lot of foundational issues over the past few years that we needed to address. That foundational work is done. Innovation on signature items, new products, news for our guests will continue at the rate that we've been at for some time. We believe in it. It's been a catalyst for our growth. We're going to be smart about it. Weight Watchers is another great example of it. I don't want to mislead you. We're big innovators. We're going to continue to do that in the future.

And then an unrelated follow up. How does the Weight Watchers plan fit into the media overall, '04 media plan? Might it take the place, for example, of a promotional advertisement in the back half? Is it going to be a tag line onto existing advertising or do you maybe not put any media against it in '04?

John, that’s a great question. I'm going to skirt that one, frankly, because we don't know. There's going to be a bunch of great insight over the next three to four months from these test markets. We're going to validate the opportunity. Certainly this is a unique target audience as we look at it. But we don't know if it's incremental visitation, is it our existing guest. Is it guests who haven't been in quite some time? As to how we market that, I'm going to reserve comment until a future date.

Great. Thank you.

Thanks, everybody, for joining us. I speak for the entire Applebee's team when I tell you that we're really happy with our results today. But we're not close to being satisfied relative to what we want to achieve for thisbrand . We look forward to the next quarter's call. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.