Dine Brands Global Inc (DIN) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to Applebee's first quarter 2004 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 should require assistance during the conference, please press star then 0 on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Carol DiRaimo. Ma'am?

Good morning, and thank you for joining Applebee's first quarter 2004 conference call. This call is being broadcast simultaneously over the Internet.

With me today are Dave Goebel, our Chief Operating Officer; Steven Lumpkin, our Chief Financial Officer and John Cywinski, our Chief Marketing Officer. A couple of calendar items to note. Comparable sales for the May fiscal period, which ends on May the 23rd, will be released the week of May the 24th.

Second quarter 2004 earnings are scheduled to be released on Wednesday, July the 28th after the market closes, and our quarterly conference call will be on Thursday morning, July 29th at 10:00 a.m. central time. June and July comparable sales results will be included in the second quarter earnings release.

Many of the statements we're 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 francisees to obtain financing, the continued growth of our franchisees and our ability to attract and retain qualified franchisees; the impact of intense competition [INAUDIBLE] this segment of the restaurant industry and our ability to control restaurant operating costs, which are impacted by market changes, minimum wage and other employment laws, food costs and inflation.

You should review our form 8-K filed with the SEC on February 11th, 2004 for important information about factors that could cause actual results or events to be materially different. Now I will turn the call over to Dave Goebel.

Thanks, Carol. Good morning, everyone.

A quick note. Lloyd is not with us this morning. As many of you know, he's in New York speaking at the Elliot Conference. So, Carol, John, Steve, let's get started.

Yeah.

We're off to a terrific start this year. Comparable sales in traffic growth accelerated during the quarter, and they were the highest we've seen in over a decade.

These results were well above our own expectations, and substantially exceeded the casual dining industry average as measured by Map Track [PHONETIC]. Although we don't expect to see this level of sales and traffic growth to be sustainable an ongoing basis, we do now expect system-wide comp sales to increase by at least 5% for the full year.

We continued to expand our market share during the quarter, with system-wide sales growing by 14%. And on a related note, let me give you some great information from the development front. We've increased our company development plans and now expect to open at least 32 company restaurants this year.

That's a by-product of the impressive leadership that Phil Crimmins, our Senior VP of Development, brings to the mix; and that's combined with a payoff of our acquisition strategy, where we're starting to see some nice traction in those acquired markets.

Add to that continued impressive performance around our people metrics and solid executions from Carin Stutz's operating team; and that explains why I say we've got great news.

But you know what? You can also count on this, we're not going to rest on our laurels. We remain very focused on driving average weekly sales during 2004 and beyond. There is still a lot of headroom here.

As you know, we've been developing and implementing a number of initiatives to drive top line revenue -- KDS and Car Side -- and in a few moments, you're going to hear about Weight Watchers, and John's going to share some new promotional news around our current campaign. Now, a quick update as it relates to the Kitchen Display System. As of July 2003, all company restaurants had completed installation of KDS. On the franchise side, as we've said, rollout is under way.

Less than 80 franchise stores were on KDS at the end of the year, and that number has increased to over 450 at the end of March. And doing the math for you, we have over half the system on KDS as we speak, and we have capacity to add at a pace of about 100 restaurants a month.

The good news and enthusiasm for KDS is spreading throughout the system, and we clearly expect rapid deployment through 2004 and into early 2005. KDS is proving to be a tremendous enabler to Car Side, and most of our franchisees are staging KDS rollout in front of Car Side.

Customer scores on hot food and speed of service continue to go up. Ticket times are being reduced, and improved throughput is pumping incremental revenue into these peak periods.

The combination of best demonstrated practices around convenience, combined with KDS, have led to that 13% reduction in the total experience time. That's 7 minutes of convenience for the customer and 7 additional minutes of throughput opportunity for the restaurant.

Let's move on to Car Side. On the Car Side front, you'll recall we completed the Company rollout in November, and 315 restaurants had implemented -- franchise restaurants -- had implemented Car Side at the end of the year. That number has grown to just over 400 franchise stores at the end of March.

That's over half the system, and that pace we're beginning to see accelerate as our franchisees complete KDS rollout. Just for the moment, follow me into the shoes of our franchisees. '04 is going to be an awesome year for them in terms of rolling out top line initiative.

In addition to the rollout of KDS and Car Side to Go, they're also layering in restaurant remodels into their schedule; and as we speak, preparations are under way to implement Weight Watchers. Our franchise ops team is working in partnership with every group to stage these events in the smartest way possible.

And we're certainly going to support a situation where it's prudent to have a franchisee extend Car Side rollout to the back half of the year and turn on local marketing support when they're ready. As for the mix numbers, mix in Company restaurants in Q1 '04 was 94 versus 68 in Q1 of '03 in Company restaurants.

In terms of dollars, over $4500 per week came from -- came from To Go, and that's up about 50% from where we were a year ago. And To Go remains our fastest growing day part. We turned on media starting in mid-January, and John will detail this a little bit more for you in a bit. We believe there's still a lot of runway in front of us on average weekly sales.

But you know, that's only going to be realized if we allow our field team to stay incredibly focused on execution around these initiatives. I can't emphasize enough: It's continued about focus and obsessive execution.

Our commitment to our field organization is to continue to help them fine-tune their operations by sharing best practices with them and continuing a demonstrated discipline to stage these events in a way that enables maximizing revenue and also return on investment.

So, with that, John, I'll turn it over to you.

Thanks, Dave. Good morning, everyone. I'd like to highlight the 1-2 punch which helped us generate such terrific results for the quarter, and then I'd like segue to some exciting news that we have coming up here in May.

The 1-2 punch I'm referring to is the combination of our nationally advertised campaign events, as well as our locally advertised Car Side To Go. On the campaign front, we started the year with a truly innovative three-course combos event, which provided our guests with an appetizer, entre and dessert all for one low price.

As you may recall, the TV ad featured our own playful lyrics to the [INAUDIBLE] classic, "Do You Love Me" -- or in our case, "Do You Love Three". In retrospect, this new event is really proving to be one of the all-time greatest value propositions we've provided our guests, and the results speak for themselves.

We then followed three-course combos with our signature Steak and Shrimp Double Features on March 1st. Once again, we stayed light-hearted with our own lyrics to the song "Happy Together", which was extremely well received by our guests. So while we supported our campaign events with national advertising, we simultaneously supported Car Side to Go in all type of markets with local advertising.

We started with an introductory Car Side direct mailing in January to households within about a 3 to 5-mile radius of each company restaurant. We complimented this with three successive flights of local TV and/or radio as part of a fully-integrated new product launch, essentially replicating our Q4 test plan.

This activity was front-loaded throughout the quarter, with virtually all television media concluding on April 10th, while radio continued throughout the month of April. The good news here is that most franchise markets have yet to benefit from a Car Side introductory plan. This benefit will come throughout the course of the year as they convert to Car Side and begin their local marketing.

Now, let's turn our attention to the next 1-2 punch, Baby Back Ribs and Weight Watchers. With these two initiatives, we're addressing the primary gaps remaining on our menu. As we speak, we are introducing Applebee's new Honey Barbecue Baby Back Ribs in all restaurants throughout the Company. In Company markets, we were priced at either 13 or $14.99, providing a potentially significant contribution to our average check.

National advertising begins next week with what you heard repeatedly at the start of the call, a parody version of our number one song -- or the number one song in all of country music last year, titled "I Want to Talk About Me." We're anxious for you to see the ad on TV, where the Baby Backs look almost as mouth watering as they actually taste in our restaurants.

We really encourage you to come on in and give them a try. Bottom line, this is a product that guests expect in casual dining. Baby Backs not only represent news at Applebee's, but they also provide us a tasty, high-end compliment to our signature riblet offering. However, that's only one component of our Spring menu.

After six months of testing, we're now ready to introduce our new Weight Watchers initiative in all domestic restaurants on May 17th, a little less than three weeks from now. We have 10 great tastes new products, consisting of two appetizers, six entres and two desserts, all with the Weight Watchers winning points designation. These are the best performing of the original 18 products we tested across five test markets, as you may recall, beginning this past November.

They will be featured prominently in a dedicated new section of our core menu, designed to provide choice without compromise. Our guests can choose to indulge in their familiar favorites they've come to love over the years, or they can choose to try one of our new lighter offerings from Weight Watchers. Regardless of their choice, they will continue to discover what Applebee's is known for -- great taste, abundant portions, endless variety and absolutely unbeatable value.

And since Weight Watchers is now part of our core menu, you can expect it to be refreshed twice a year along the -- along with the rest of the menu. Now from a marketing perspective, Weight Watchers provides us a unique opportunity to create a very targeted campaign in what is traditionally known as that Spring/Summer swimsuit season.

While Weight Watchers members and leaders certainly represent the bullseye of that target audience, the broader opportunity is the general health and weight-conscious consumer. Therefore, we will employ a duel strategy to reach both audiences.

We will appropriately communicate with the Weight Watchers membership via their website, their magazine, direct mail and, of course, the Weight Watchers meetings, where about 1 million members meet each and every week. Additionally, we will implement an extensive magazine campaign designed to showcase our new menu.

This campaign will target the health and weight-conscious consumers throughout the summer in a variety of women's editorial, fashion, healthy lifestyle and general interest publications. And while this effort will certainly sku female, it will also reach males. In contrast to our TV-driven campaigns, Weight Watchers will be a print-intensive initiative.

So unlike TV, which is a frequency medium and builds awareness pretty quickly, magazine print is a reach medium, which builds over time. Our magazine schedule will allow us to be very targeted and very efficient in generating trial.

Weight Watchers television will be used opportunistically as a secondary medium; and while you won't see much TV in May/June, you can expect to see local market television support this summer in company markets. You will also notice that our positioning for this initiative has changed from the familiar "eatin' good in the neighborhood" to the new "eatin' right never tasted so good".

A line that has really resonated with our guests. And the creative tone of the advertising is smart, it's empowering, a little light-hearted, and it's all about taste. Needless to say, we're proud of our partnership with Weight Watchers. We remain convinced that Weight Watchers is the one enduring brand in the market that is both healthy and sustainable and capable of transcending the short-term trends that inevitably come and go over time.

We certainly look forward to a promising future together. So, what do Car Side, Baby Backs and Weight Watchers all have in common? They are meaningful, permanent, branded benefits that can differentiate Applebee's and ultimately lead to even greater preference and sustained growth.

In closing, we couldn't be more enthusiastic about our business momentum and the pipeline of innovation yet to come. With that, I'll turn it to Steve.

Great, John. Thank you. And good morning, everybody. And as always, thanks for your interest in the Company.

I hope you, by listening to what John had to say, really understand the -- the confidence this team has and the excitement this team has on kind of the next wave of innovation here at Applebee's. We really look forward to what it's going to do for us and what it's going to do for our customers. Let's take a quick look at the numbers for Q1 and then I'll, at the end, talk about how we think about the rest of the year.

Now, company sales -- company sales were up 17% to nearly $244 million. Driven by, as John and David talked about, great comp sales in the quarter of 8.7%, on top of a capacity increase of 8%. This capacity increase was due to us opening 31 company restaurants during the last year, and that's an organic growth rate of over 8%.

As Dave mentioned, company development is accelerating. Now, franchise royalties and fees of 13.3% to nearly $31 million, driven by those strong franchise comps of 8% and 69 openings on the franchise side during the last year, this represents normalized capacity growth of approximately 6%, and that excludes the impact of franchise acquisitions and dispositions.

Other franchise income came in at $3.1 million, 2.8 of that being relating to the insurance captive and the balance to services we provide to our franchise partners. Total revenues for the quarter were $277 million, that's up 16.5%.

System-wide sales for the quarter increased 14%, and that was driven again by the strong system-wide comps of 8.2, a 6% capacity growth with 100 new restaurants opened in the last 12 months. Now, going to net income, net income came in at $29.5 million, that's up a healthy 20% versus last year. Diluted EPS was up a strong 21% to 52 cents a share -- that's versus 43 cents last year.

Now, let's take a -- a quick jump through the P&L here. Overall restaurant margin before preopening came in at 17%. That was a 40 basis point improvement over last year; and you know, that's the best margin we've run in a quarter since Q2 of the year 2000. It may be one of the best margins we've run in the first quarter of any year.

Food costs came in at 26.1%. Now, that's down 20 basis points -- you know, despite all the concerns we've been hearing about commodity costs, we showed a nice 20-point improvement in food costs.

This -- the impact of -- of our slightly higher commodities cost was offset by the -- excuse me, by the price increase of 1.5 we took in January. And just to kind of reground everybody on what we've done this year, we did lock our pricing on steak for the first 10 months at a 4 to 5% increase, and we've locked chicken through January of '05, up 5%.

And I think we've been talking about, we're not big users of dairy, not a lot of impact there, so even though steak, chicken and dairy are up, we continue to expect our total protein complex plus dairy and oils to be up approximately 3% for the full year. We think that's a great number in the current commodities environment.

Now obviously, food costs are going to vary based on the promotion, and the Baby Back promotion we just started does have high food cost percent, but we expect high dollars in gross margin off of this campaign. So net-net, with the exception of a higher cost Baby Back ribs in our numbers, overall commodities costs aren't just a big concern of this management team.

Now, moving to labor, labor overall came in at 32.7. That was down 10 basis points. Now, as you kind of parse what happened with labor, we did get 90 basis points of leverage at the management and hourly labor lines from higher sales volume.

This was offset by an increase in the dedicated To Go labor, labor of about 55 basis points, so that's a sequential improvement, as we continue to make the labor investment to establish leading service levels at the Car Side.

We also had higher Worker's Compensation expense, up 25 basis points, and insurance costs continued to misbehave in this environment. Management wage rates were up approximately 2.5 to 3, reflecting our excellent management retention, while hourly wage rates were up 1.5 to 2.

Now, moving to D&O, D&O was flat at 21.3. We did get 85 basis points of leverage, due to higher sales volumes at the rent line. R&M and depreciation, each one of those showed about a 20 basis point improvement, and we also got some miscellaneous other leverage of about 25.

Offsetting that leverage was higher Car Side to Go advertising, due to the planned ramp up in company markets that John talked about. So advertising was up 60 basis points and we discussed that on our last call.

In addition to advertising, we had higher To Go packaging, that's up about 15 basis points, and property and liability insurance -- again, up 10. So as with come off this quarter, we see the insurance-related lines up a total of about 35 basis points. That combines Work Comp, property and liability insurance.

For us, insurance remains a key area of focus for the balance of the year. Now, preopening -- preopening, we did have five additional openings this quarter versus last year, so preopening was up $330,000.

G&A came in at 9.2%, down 30 basis points due to leverage on higher sales, offset by slightly higher staffing levels. I will also say in the G&A, we're starting to get into our Sarbanes 404 compliance season here. And if you'd like, we can talk about that. The Company is expecting, though, to spend 500 to $600,000 on 404 compliance.

Our guidance remains unchanged at the G&A at the low 9s, but we wanted you to know that there is a cost, certainly to the Company, to comply with this -- these requirements. Tax rate came in at 35 even, lower than last year due to a reduction in state and local.

We re-evaluated our tax rate following the completion of our year-end results and now have greater visibility to tax savings initiatives, especially the state level. Now, a quick trip through the balance sheet here. Cash and investments at the end of the quarter, $9.8 million. Debt was at 26, that was up $5 million. Debt-to-cap of 5.2.

Shares outstanding at the end of the quarter came in at $54.8 million. We did repurchase some stock in the quarter, about $68 million. I'm sorry, $68 million remains under our authorization. We bought back $32 million, at an average price of $37.46.

So, let's now -- we did have a number of things change in our guidance, and let's kind of go through those. Top of the list is our expectations on development. We now expect more than 100 new restaurants to open in 2004, and that includes at least 32 company and 70 to 80 franchise.

12 company restaurants are now expected to open in the first half of the year, with the balance in the second half. And approximately 20 franchise restaurants are expected to open first half with the remainder in the second half.

We, again, are back-end loaded this year, as we have been for the last, really, two or three or four years. Note that we've increased our company number from at least 28 to at least 32, due to our strong development pipeline that Dave talked about.

Now, with regard to that stronger pipeline, some of you may have seen reports in the press over the last week regarding our successful bid to acquire a half a dozen closed Ground Round sites. What we can say today is we were the successful bidder on those six sites.

However, they are subject to final confirmation by the Bankruptcy Court. We aren't anticipating any issues there. The majority of these new sites are in the New England area. Our expanded opening guidance does not assume currently that we'll open any of these six sites this year.

Now, based on our strong performance through the April period, system-wide comparable sales are now expected to increase by at least 5% full year. Of course, monthly sales may be a little more volatile, given shifts in calendar, prior year comparisons or unusual events.

Margin -- overall margin before preopen is expected to be similar to last year. G&A, as I said, as a percent of revenue is expected to be low 9%. Tax rate is currently expected to continue at 35 even for the remainder of the year.

Now, we did raise Cap Ex here, given the very robust pipeline we've got. Cap Ex is now estimated to be between 95 and $105 million. That increase is due to us making a provision for the acquisition of the Ground Round stores, for expanded company development 42 year, as well as we'll be spending some capital this year for '05 openings. So, now as the franchise acquisitions, two days ago, we closed on the previously-announced acquisition of our 10 franchised restaurants in Southern California -- over $13.4 million in cash, and that is subject to some final adjustments here in the deal.

Finally, as EPS, based on these assumptions and the Company's performance here in the quarter, diluted EPS for full year is expected to be in the range of $2.02 to $206, including the impact of potential stock repurchase activity.

So operator, with that, we've concluded our followed remarks, and let's open it up to Q&A.

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 or you wish to remove yourself from the queue, please press the pound key.

Again, if you have a question at this time, please press the 1 key on your touch-tone telephone. Our first question comes from Joe Buckley of Bear Stearns.

Thank you. Question on the flat restaurant margin guidance. Are your thoughts still that the advertising, which is obviously kind of front-loaded in the first quarter, would kind of diminish in terms of percentage of sales spending as the year goes on?

And if so, would it be reasonable to expect a little bit of margin expansion as the year progresses?

Yeah, I think, Joe, you know, we're -- you know, it's pretty early in the year here. You know, I think when you -- when we say guidance similar to last year, I think you could -- that would not necessarily imply that we've got flat margin.

I think we have talked about the front-end loading of advertising here, and it's different than last year; so we're front-end loaded this year, but you know, a little bit less on the back end.

So, I think we're thoughtful here of -- of being hit early in the year, and I think as we kind of go forward here, see how Weight Watchers is going to impact us, see what Baby Backs does, which were both very favorable about.

I think we may have the opportunity to take a look at our guidance again in the second quarter.

Just one other question, again, kind of an advertising question. Is there a big difference in the Car Side To Go mix when you're on TV and off TV -- does TV tend to drive it more?

Joe, this is John. We found our guest -- consumers in general, to be very responsive to this message. Car Side is very convenient, it's relevant, it's meaningful. The fact that we -- that you don't have to jump out of your car.

And so it's one of the reasons we will continue to support it from an advertising standpoint.

Joe, I think, you know, as the -- what we've seen here is that we go on television, we do a direct mail drop, we do drive time radio. We do see a nice pop-up and it is sustained.

So we're not seeing -- this wouldn't be -- don't think of it like a campaign, where we -- as we get to lower rates on national television towards the end of the campaign there's less awareness, we're still in the early phases of creating a category here with the consumer.

Yeah, I think Steve's right. There is a bit of an education process here as to how this works. And so it's going to take the consumer two or three times to figure it out, and it is a permanent part of our business, it's here to stay, and we do expect levels to sustain.

Okay. Just one last question. You mentioned restaurant remodels as, you know, one of the sales-building initiatives.

Can you talk about what's -- what your experience has been thus far? And, you know, how aggressive the remodel program might be for both Company and franchise this year?

Sure, Joe, one clarification, the restaurant remodel was really mentioned in the context of the franchisees overall initiatives. In terms of the scope of that, we're upwards of 200 remodels that we'll complete prior to the end of this year, a combination of Company and franchise.

This is a little bit of a new look, as we've said before. We've done some things that I would say are a little more incremental than our traditional refreshening. I think you've seen some shots of those new look remodels, where we're creating a back bar, pulling the bar header down, doing some exciting things inside the restaurant.

Absolutely not quantifying any of that in terms of what it means to the sales reps at this point. We typically view our investment in remodels as cost of entry to stay in the game.

Okay. And how much are you running? How much will they cost from an investment standpoint?

Think it terms of 115 to $125,000.

Okay. Thank you.

And Joe, that's very consistent what they have been running.

Okay.

Thanks, Joe.

Thanks.

Our next question comes from Peter Oakes of Piper Jaffray.

Hi. Good morning.

Hi, Peter, good morning.

Hi.

I'm kind of the back of the Baby Backs ribs and the higher price points. If we go back the last couple of years, you've definitely made some big inroads in the food quality and the overall guest experience.

Does that prompt you to explore the higher-end price points on your menu over time as the consumer has given you more credit and as you -- you know, you were just discussing with Joe -- the impact of the remodels?

Hey, Peter, it's John. You know, we look at the menu as a portfolio of offerings. We like to have entry-level prices. We like to have high-end prices.

We like to have a lot of mid-tier pricing, all driven by what we're hearing from our guests. And Baby Backs clearly is an example of a higher-priced item that has been a -- it's been a gap for us. It's really almost a price of entry in the casual dining sector today and so that represents news for us.

We're going to leverage that. It doesn't suggest a trend toward higher priced items, I want to be very clear there. We will evolve the menu appropriately, and that will include all three of those tiers that I just referenced.

Okay, and actually on the To Go side, this was -- was the biggest increase, at least from our records, the biggest quarterly increase that we've seen.

Can you share with us what you seem to be learning as far as the intent to repurchase and -- and how much of that is growing the customer base versus people just getting more and more comfortable with the use, you know, from the existing customers? Thanks.

A couple of thoughts there, Peter. I think first of all, some of the -- some of the learning is really around the efficiency that we're gaining as we deal with some of the increased volumes in Car Side. It relates to how many parking spots we dedicate.

We have a lot of flexibility there. Also in terms of, obviously, the staffing around that Car Side specialty. In terms of your issue about intent to return, we are doing our customer service index for Car Side, as well as the one we use in the dining room.

Our scores are consistently a little higher in Car Side right now. I think that's an expectation issue and we continue to verify through that CSI that we're in the neighborhood of about 85% incremental guests for that Car Side experience.

Peter, Steve. Good morning. I think also we think it's going to be very compelling when we combine a new offering like Baby Back Ribs, which are great for take-out, especially around sporting events or stuff at home, as well as with our Weight Watchers menu.

We get a whole new ability to now merchandise using two new features of our brand on the menu with a new service offering. And so all of that is ahead of us and so that's -- that's why we think we're just starting to really see how the customer here is going to react to this part of our business.

Okay. Thanks a lot.

You bet, thanks.

Our next question comes from Bob Derrington of Morgan Keegan.

Yeah, hey, John, if I could stick with Baby Backs for a second and actually, I guess, both it and Weight Watchers, both of these seem to be really key initiatives that could have, you know, an impact on what has been traditionally both the average check, consumer use, et cetera.

Can you give us any experience that you've seen with each of these initiatives? Both -- and for example, with Weight Watchers, how it's affected the check average, whether it's cannibalized existing sales, whether you see incremental usage? And the same kind of questions around Baby Backs.

Sure. First off, I'd say Weight Watchers is essentially check neutral as we look at it. Baby Backs -- keep it mind we haven't marketed that at a national level, so I'm not sure how much trial we're going to generate, what percentage of mix it's going to be.

Same thing can be said of Weight Watchers as well. While we were in tests in five different markets for a period of about three months, we really didn't leverage the marketing resource we have at our disposal. So as to the incrimentality on both of these, we really don't know. I wish we could provide some color on that, but we're going to find out very shortly.

We can tell you that we met our objectives from a testing standpoint, otherwise we wouldn't be moving forward here.

You know, feedback from consumers? You know, I assume good, fair?

Exceptional. You know, on Weight Watchers, abundant portions, tremendous taste, great variety.

Not just with the Weight Watchers membership, not just with health-conscious consumers, but males and females, people of different ages -- Baby Back Ribs, they just love the taste of the honey barbecue, and tremendous quantitative and qualitative feedback on taste and intent and all of the attributes that we tend to -- all the measures that we tend look at.

So we're very enthusiastic about both of these.

Hey Bob, just a quick note here on how the Weight Watchers items scored versus our regular menu items. They actually scored higher on a lot of the dimensions we look at in terms of taste quality, value for the money, reorder intent, so, we're actually, you know, really pleased with that.

You know, Bob, we've been very deliberate, frankly with the of -- rollout of both of these initiatives, this has been an interim process and -- by design, so that when we do go national, we go national with a winning formula and we're very confident with both.

Steve, is it reasonable to expect that the Ground Round potential acquisition could close sometime, you know, Q3? And how much time would you expect -- how much work do these, you know, restaurants need in order to be converted?

Yep, Bob, it's been a while since I worked the market. I'm not familiar with the -- some of these sites. The one I am familiar with. I think anytime you're in a bankruptcy, it is -- it's a little bit of a jump-all because you're just not sure, but the bankruptcy judge in this case, I think, is highly incented to get, you know, these transactions closed.

We are inheriting, you know, in some cases sites will actually have to be completely [INAUDIBLE], and will be new stores. Some of these Ground Round locations, excellent real estate but terrible buildings themselves. So, I'm -- I'm not giving you a precise answer. Literally, we're in the process here with the judge. I would -- I wouldn't want to forecast too much about our ability, you know, to -- to get a lot of these stores open this year.

Give us -- In fact, I just want to give our development team a little bit of breathing room here to get their arms around it, and get our operations staffed up, and I think we'll really know more here in the next 30 days about where we stand on it.

Steve, what's changed -- one last question -- what's changed with the Company talking about at least 32 new stores -- and again, I assume that's excluding both these Ground Rounds as well as the franchise acquisition.

What is the Company's view on unit development now? Do you see better opportunities in locations which you previously hadn't considered? Or --

Bob, this is Dave. I think there are a couple of thoughts there. I'm going to start with people.

You know, one of the foundational pieces here is our ability to ramp-up new store growth now with this single digit general manager turnover numbers, and you know, turnover in the teams on managers certainly gives us the opportunity to ramp up without putting undue strain on operations an undue strain on people.

To the second part of that, Bob, clearly, as we continue, and I mentioned in my opening remarks, some of the work that Phil Crimmins is helping us do, as we look more seriously into some of the urban markets for opportunity there, and also the fact that with this acquired territory, we certainly see some blue sky in front of us that's got us awfully excited about accelerating market penetration in those acquired territories.

Great, thank you, Dave.

You bet.

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

Hi, folks. Could you give us a sense of -- haven't seen some of the Weight Watchers stuff in market, it's very operationally key that the recipes are followed, you know, exactly and portion sizes, et cetera.

Give us a sense of sort of the incremental training and costs that you're bearing and where that would show up here in the 2Q?

Well, first of all, in terms of the training costs, a lot of that, Andrew, is built into our already-planned G&A for this year.

One of the things that we've found early on is that the initial scores here -- we've been in some fairly intense training with company franchise operations the last couple of weeks -- and the scores from our -- from our operators about that training have been off the charts, very, very positive.

We've got great printed material, there is a video that accompanies it. We've had leaders here in town working in our culinary center. In terms of assuring to the guests that we will deliver what we promise in Weight Watchers, what we've done in the back of the house -- house by special coding of the Weight Watchers product, what we've done on the front line to isolate this product is really -- is really very well done.

And we're excited about what lies ahead.

Andy, we're not forecasting really any kind of, you know, reduction in our margin or -- or training costs that aren't in line with trend on this. Even though this is a substantial new introduction of product, it is a new menu and we've done this routinely. So, I think that's -- we're not thinking about it that way.

I think our field is focused on the -- on some of these items, as Dave mentioned, have to be prepared a little more exactly. You know, you have to get a few more steps to make sure that we're delivering the number of points -- and I'm not sure it was clear on our call this morning, but we are rolling this with a new Spring menu, so that will be coming up here, as John says in about three weeks.

So in addition to the Weight Watchers, we will have other new menu items, and part of that training will be integrated.

Andy, the -- it's John -- just to piggyback on that -- we -- in terms of that Spring menu, that is probably, over the past five years, the most extensive change to our menu in terms of new news. And if you recall, we announced Weight Watchers publicly I think about in -- about a year ago, back in the summer. And there were a lot of questions about, can you move faster? And why not -- you know, why are you waiting so long?

We were very deliberate, very disciplined for the very reason that you outlined -- we wanted to make sure we got this right. We -- in terms of compliance, in terms of labor, in terms of execution. We are rolling this out now because we have that nailed.

And we're thrilled with the news this represents. We encourage you to pick up our Spring menu, because there's -- in addition to Baby Backs and Weight Watchers, there are actually some other new products in it that are pretty darn good.

Great. One other quick question on ribs. In anticipation, sort of what you guys have determined usage will be, how much supply do you currently have or what's your contract on -- on the Baby Back product currently?

Yeah, Andy, it's Steve. We've -- when -- if you flux our inventory on the balance sheet, you will actually see that we've been increasing inventories -- a big chunk of that is the -- is the ribs we've been building in preparation for this campaign.

We've got good supply. Supply chain team moved into the market last Fall and actually has started -- you know, has started to take, you know, loads of ribs since then, and our anticipation is this is a -- this is going on as a core menu item here on our April menu, and we're in good shape on supply.

Thank you.

Okay? Thanks, Andy.

Our next question comes from John Glass of CIBC.

Thanks. Good morning. I had a question back on the Weight Watchers menu, are you finding that non-Weight Watchers menus are using this as their "better for you" or your "better for you" version?

And is it surprised you that the proportion of people, if you analyzed that data, or do you think there's maybe room on the menu still for some "better for you" foods, if you will.

John, it's John Cywinski. It's a good question. We have designed these 10 items to be great-tasting Applebee's menu items. And they are appealing to just about everyone.

We suspect there's going to be a pretty broad base of trial. We know the bullseye of that audience. We know the broader health and weight conscious consumer; but surprisingly we saw a lot of people trying this product in test who maybe we wouldn't have expected, and they came away very, very favorably surprised with the portion size the taste.

So, time will tell. I think we'll have a good read on that within the next 120 days.

And as you prepare to go national, is there any -- maybe you want to elaborate a little bit more on the percentage of mix that you are seeing? And also, the reason the trend is surprising; for example, there's a lot more of this going out the To Go door or different day parts than you might normally have expected it to to?

John, Steve. I will comment on mix. And this is what I've been saying very consistently to all our investors for the last, you know, couple of months. We -- we have enough data in-house to make a great decision around, you know, national launch of the product.

I don't want to forecast what it's going to do for mix, because even though we're very pleased with the mix numbers, it's unleveraged from any kind of external marketing and messaging. And I really want to get, instead of a, you know, a small sample size, I want a big sample size of the whole system, roll it forward, and I think we will be in a good position to talk about mix this summer.

Make sense?

Makes sense.

Okay?

Next question.

Our next question comes from Coralee Witter of Goldman Sachs.

Hi. With regard to the unit opening schedule and the acceleration this year, should we read into that as a signal for where unit growth can go in future years? And do you have the infrastructure and ability to be able to accelerate the opening schedule further?

Yeah, Coralee, it's Steve. I think -- I think what you're seeing is a -- is a trend on the Company side that reflects us maximizing the value to territories we have acquired. And for us, really our development team is doing a great job of building a great -- a big pipeline.

I mean, this is the biggest pipeline that I can recall in memory, if you look at what we've got approved on our construction for the Company. So, I would say what you're seeing here is the Company being more bullish about what the Company can do. Now I would say that it would be -- it would be premature for us to talk about any increase of overall expectation for the system.

Now, that being said, I will say that this is a year -- it's been about two years since we looked at that data. I will say that our development team, that's something we're looking at this year, along with our franchise partners, to get at overall how we feel about the full potential.

So the Company is -- is on a roll right now, and I think you can expect that to continue into 2005.

Okay, and then in a separate question, you had commented on To Go costs increasing some of your line item expenses, which is to be expected. The question I have is, how much of that is -- is ongoing versus a -- a one-off increase in preparation for the rollout?

Yeah, the couple things we talked about was the dedicated To Go specials, that's going to be a permanent part of our cost structure. Actually, on a sequential basis, it's getting better at 55, you know, basis points, you know, this quarter.

I believe I'd have to check my -- my memory here, I think it was 65 basis points in -- in Q4 of last year. Advertising, you know, is -- was a little bit of shift this year, but you know, that will get more back to sustaining levels.

Packaging is up, but -- a little bit, in this quarter -- but as our mix goes up, we would expect to see packaging continue to increase, so, basically it kind of -- the full-time things in our number are going to be dedicated labor and packaging and then, you know, advertising would be something that, you know, we still expect to be at 4% for the full year.

Okay. And then the final question I have is, your franchisees are working on a lot of sales-building issues at once with the rollout of Car Side and Weight Watchers, and it seems that some of them are doing it at the same time.

Is this maybe too much all at once? Does it make sense to string out the Car Side rollout a little bit further? And is execution within the four walls still strong with all of these efforts going on at the same time?

Coralee, this is Dave. I think if someone were to take on all of them at one time, that would be a lot. And it's rare that we see any groups that haven't done some staging here.

Our -- our most recent information, and what as recently as last week with our franchisees we've spoken to is that it seems to be very prudent to get the KDS rollout complete, learn that, embrace that, take advantage of what that means in terms of ticket times and kitchen efficiency, and then follow on the heels of that with Car Side.

As you might expect, as we look at the rollout schedule here for '04, we actually see on Car Side and KDS, a little bit of a window as we take on Weight Watchers and Baby Back, because once again, the disciplined schedule that the franchisees are using in conjunction with company ops I think addresses exactly what you've said, it that let's be sure we don't try to out too much into the funnel at one time.

Now, to the last part of that, in terms of what does it mean ultimately for Car Side rollout, as I said, we're going to see that Car Side franchise rollout really start to ramp up as they complete KDS. And I think in Q3 and Q4 we're going to see an awful lot of the system now completely on Car Side.

Great, thank you.

Thanks, Coralee.

You bet.

Our next question comes from Skip Carpenter of Thomas Weisel Partners.

Yes. Good morning. Steve, you had mentioned -- and maybe this is a follow-up to the question that was just asked on the labor line -- that the To Go was hurting it by about 50 [INAUDIBLE] this quarter.

I'm trying to think, why wouldn't we see that kind of debt impact diminish, particularly as we go to the November timeframe, in terms of when we lapping when it was completed into the Company system.

Skip, you're exactly right. We -- we actually will start seriously lapping this -- towards the end of Q3, mostly Q4. So, you're -- you're exactly right. What I said on a sequential basis was, we are just getting more efficient.

You know, as -- as mix approaches 10%, we're getting more efficient with our ability to know how to schedule this labor, and you'll continue to see that as the year goes on.

So, as we look to an '05 period, we wouldn't anticipate that the To Go would have a adverse kind of impact in terms of the labor margin?

I would agree with that -- on the dedicated To Go labor.

Okay, fair enough. And then second, if you would be willing to share with us, you know, you've locked into your beef needs through October.

Are you currently having the discussions as we kind of look to the November -- December timeframe -- and more importantly, in terms of '05 at this point? Or is it a little early in this game to be entering that discussion?

Yeah, I think, you know, we're -- and I hope we were clear with everybody how we feel about commodities, you know, we're certainly not disregarding what's happening in the commodities environment.

Oils and dairy and stuff are moving here, but, you know, we're very pleased with the real good results we've gotten here and, you know, approximately 3% up on a huge number of our commodities. I think as we think about the future -- and I will give you my own personal view here.

My own personal view here is that the beef market probably, as we go into next year, will -- will look to be somewhat similar to what we've seen, perhaps a slight improvement, and then in '06 an even better improvement.

I think just the -- you know, the things that are going to come back, they tend to be cyclical in this market anyway. So -- but that's my view. I think the -- we're not doing a lot right now, other than getting -- getting ourselves prepared for, you know, how we take advantage of what's going to be happening in the marketplace.

We're not doing anything to change our spec, we're not doing anything to change our portion size. We're still delivering great steaks to our guests, and if it costs us a little bit more next year, that's what it does.

We think we've got pricing power, we've been lagging, you know, virtually the whole category, in pricing -- and that's been for a reason, to be able to keep that powder dry if we need it.

Terrific, thanks so much.

Uh-huh.

Our next question comes from Jason Whitmer of MTM Midwest Research.

Good morning, great quarter.

Thank you.

Thank you.

My questions are on the franchisees. One, you know, how accretive will be the current franchise acquisitions into California? And two, also seeing some other consolidation trends within the franchisees themselves -- is that a growing trend? And is there any impact there for FP's in general?

Yeah, I think, Jason, on accretion on that deal, it is an accretive deal. We're not saying it was material at all this year. I think we -- this is a -- this was a strategic entry into this market, and we've got our best operator in the system out there.

A great operating team and so, you know, we really look for this, as Dave said, as a way we're going to accelerate, we're going to accelerate development in Southern California so, you know, we're getting our arms -- we're actually just closing up the deal, getting our arms around it now.

It's the -- the extent of its accretion is already built into our guidance that we've put together you know, to '03 to '06. Now, with regard to other franchisees, you must be -- you're probably referencing Apple American, which is our largest franchisee --

Yeah.

-- that currently -- I did a transaction in Pittsburgh. I think, you know, any -- any year there's three to six transactions in the system on the average, the Company may be involved in a couple. I think it's -- what you're seeing is our -- our larger franchisees, they're getting the scale advantages that come with size.

They're getting tremendous scale advantages in operations -- and so certainly, one could expect that in the future we could see our larger franchisees get even larger, and we think that's something that's good for the system.

Good. And in general from a broader picture, your traffic trends have been phenomenal.

Is the market share perspectives you have, do you think you're dipping down into the fast casual or the QSR, even just from other peers in general?

Hey Jason, it's John. Absolutely. You know, our guest is coming from virtually every segment and category out there.

And that would include mid-scale, fast casual and QSR, given the initiatives, including Car Side.

Great, thanks a lot.

Thank you.

Our next question comes from Scott Mallet of UBS.

Hi, actually, David Palmer. My question is on growth opportunities by day part and I guess lunch in particular.

It seems that, you know, starting a few years back, you added to and improved your sandwiches and salads, now you're focusing on KDS and speed of service. I'm curious, have you seen better than average growth in that day part in the lunch business? And do you see that being an opportunity for you?

David, it's John. We've seen growth across all day parts.

And -- and continue to view each day part as a significant business opportunity and headroom. As we've talked before, there are many restaurants in our system operating well above $3 million. And they're all growing at each and every day part that we have.

Lunch has been a very successful day part for us and will continue to be an opportunity for improvement as well, both from the menu perspective and from a volume perspective.

Yeah, I think -- I think, David, we're -- how we're thinking about it, it's so critical to us to rationally stage our improvement initiatives, and we've got a lot headed into the system.

In fact, I think our franchisees and Company operators have had visibility into initiatives that are going to go well beyond 2005. So you know, we won't single out lunch today as something that is foremost in our thoughts, other than to say we want to make the initiatives we have visible in the marketplace now.

We want to absolutely maximize those. We think we've got tremendous ability to drive a lot of things. And then we are working on -- and that's the luxury, I think, this management team has -- we're working on stuff that's going to impact '05 and '06.

And the other thing I'd mention is that back to kind of a KDS comment relative to lunch, one of the benefits we see from KDS, particularly at a day part where the guest is really dialed up in terms of their need for convenience, KDS has done a great job in terms of speeding that lunch occasion for us. David, we know at lunch, in particular, it's got to be the right food, it's got to be fast because there are constraints at lunch that you don't have at the dinner day part, and it's got to be a great value. Those are the screwdrivers for us, and you will hear more news in the future.

Okay, can I just ask one quick follow-up? And that is, you mentioned that there was -- at least part of the advertising support for Car Side to Go at the Company -- in the Company markets would taper off in April, and I think you said that there on would be local TV advertising support behind Weight Watchers in company markets.

And I'm just wondering, you know, how those things net out in terms of incremental advertising costs in your D&L line in it 2Q and beyond?

David, there will be no incremental there. So it's a matter of mix for us. We're going to play this out over the summer. Many markets are going to get both Car Side and Weight Watchers support.

We're going to isolate those variables, so some markets may only get Weight Watchers. Some may get Car Side. We're going to generate a lot of learning. We'll be real smart as we head into '05.

Yeah, full year, David, it's still going to be a 4%. But it wouldn't be unusual if you were in a -- a market with significant Applebee's penetration to see Baby Back ribs on TV, to see -- to hear drive time radio behind Car Sideb and ultimately you're going to see a Weight Watchers television spot.

So, what John likes to talk about, even though we have a particular piece of media going after our product or a service feature, it's still talking Applebee's, and we've got a lot of things that are talking Applebee's, and that has a synergistic affect on what happens to the consumer.

We're big believers in multi-messaging and being very targeted and looking for incremental growth opportunities.

That's the name of the game, and we believe that's why we've been successful on the traffic front.

Operator, we're coming up on an hour. I think we've got -- we can take probably two more calls, at most.

Our next question comes from Glen Guard of Legg Mason.

Hi, thanks. I'll make it brief, then.

Just want to focus on portion sizes outside of Weight Watchers. What are -- is there any change in what customers are saying they want?

I know ribs are priced pretty competitively versus a couple of your peers. Is that because of smaller portions, is that what customers want, is the right portion maybe a bit smaller than it was a few years ago? And are there future cost saving opportunities?

Glen, that's a great question. This is John. We, again, look at our entire portfolio, and we are driven by our guest. We look at taste. We look at value. Value scores on every menu item.

And we do a lot of testing, so ultimately what makes its way onto the plate is what our guests provide a big thumbs up on. And so, you know, I think you will be pleasantly surprised with portion size around the Weight Watchers items, as an example; but we don't have a mandate right now with menu evolution to be at a specific portion size with a specific component of our menu.

We're going to be driven by the guest and providing superior value with each and every offering that we provide.

Yeah, and David -- Steve. I think this a real important point and -- and I don't want to stomp on it too hard here, but the point is that we were not going to go to changing portion size, specification for being able to, you know, pinch the middle of our -- or improve upon our P&L.

So Glen, I think you did ask a question on ribs. Our ribs here are -- are not smaller than people's in the category. In fact, we've got a national competitor that's priced at 16.99. We're going to be priced at $13.99 and most markets on this product, it's a product that's comparative or even bigger than that price point.

So we are, as John said, all about value.

Okay. Great. Thanks a lot.

You bet. Our final question, operator?

Our final question is a follow-up from Joe Buckley of Bear Stearns.

Thank you, guys. Just two quick ones, I hope. You mentioned, you know, buying these six Ground Rounds, there were many more Ground Round closures. Are there more opportunities within that chain for you, do you think?

Joe, I think we're basically done. I think the auction's been held in bankruptcy and there is still a lot of dust that has to settle. We wanted to cherry-pick the best sites as they fit on our map in New England.

These are some wonderful trade areas that we've been actually looking at for years, but were locked because there's no real estate availability. These fit hand and glove. I will say, Joe, four of the sites are in New England, two of the sites are in Minnesota.

Okay.

Okay?

And then one final question for John. Just as you think of the staging of your marketing, any thoughts on the presidential election and how that can sometimes squeeze advertisers off the air in the -- in the September/October timeframe?

Sure, Joe. We're very thoughtful of, you know, unique events, Olympics, presidential elections -- we plan well in advance.

As an example, we have a very clear idea of what we're going to be doing in '05 from a marking and media perspective. That advance planning not only brings efficiencies, but we anticipate all of those events and plan accordingly.

So we have no concerns whatsoever around our ability to reach our guests with meaningful messages, particularly at that presidential election timeframe.

Okay, Joe, thanks.

Thank you.

That -- that concludes our call today. Thanks to everyone, again, for joining. We look forward to catching up with each one of you if you've got additional questions after the call today.

Thanks, operator. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.