Dine Brands Global Inc (DIN) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome tome Applebee's International second quarter, 2004 earnings release conference call. The participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press *, then 0 on your touch tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host, for today's conference, Ms. Carol DiRaimo, you may begin.

Thank you, and good morning. This conference call is being broadcast simultaneously over the internet. A couple of calendar items to note, comparable sales for August fiscal period which ends on August 22nd, will be released the week of August 23rd. And Third Quarter earnings are scheduled to be released on Wednesday, October 27th, after the market closes, with the quarterly conference call on Thursday morning, October 28th at 10 a.m. central time. September and October comparable sales results will be included in the Third Quarter earnings release. In addition, we will be conducting a company-sponsored analyst and investor meeting on September 8th and 9th in Kansas City, contact me if you have questions about the details. Many statements we'll make with respect to the business outlook including comparable sales increases, costs, earnings per share growth and restaurant development are forward-looking statements and based on current expectations. There are several risk and uncertainty, that can differ materially including but not limited to the company and the franchisees, and the ability of the franchisees to to obtain financing and retain qualified franchisees and the impact of intense competition the casual dining segment of the industry and the our ability to control restaurant operating costs which are impacted by market changes, minimum wages, food costs and inflation, you should review our form 8-K filed on February 11th, 2004, for important important information act factors or events to be materially different. Lastly, as you may have seen in the press, we are aware of numerous instances over the last several weeks of individuals contacting our restaurants in an effort to deceive or bribe our associates into providing information regarding our sales trends, Weight Watcher's mix, labor costs or other confidential information, the associates and franchisees are being made under false pretenses and disclosure of this information is in violation of the corporate policies. To the extent anyone is supporting as we view unethical practices please understand these actions can put at risk the livelihood of the our associates. At the meeting today are David Goebel, our COO and Steven Lumpkin, our CFO. Lloyd is on vacation time, with that I'll turn it over to Dave.

Thanks, Carol. Good morning, everyone. As we heard in the first half of the year produced an exceptional result. Comparable sales and traffic growth in both the 1st and 2nd quarters were above our own expectations and substantially exceeded the casual dining industry as measured by map track. This was despite the slowing in consumer spending seen in restaurants in retail in May and June. Although we don't expect this level of comps to remain sustainable on an ongoing basis, we come to expect system- wide comp sales to increase by at lease 5% for the full year. A few words about development. Our company development pipeline remains very strong with at least 32 company restaurants expected to open this year and a very robust pipeline as we look to 2005. Our recent entry into the Houston market produced a record-breaking opening for a company restaurant, with first week sales figures in the six figures.

Regarding development in general, I think we're building the same kind of momentum around new restaurant growth, that we're seeing around our sales initiative. The system is really rallying around this leg of our growth. The accommodation of strong comp sales growth and continued new development, has resulted in further expansion of our market share during the quarter and system-wide sales grew by 12%. You can also count on this. We 're not going to rest on our laurels. We 've said this before. We remain focused on driving average weekly sales for the balance of 2004 and beyond. And we're convinced there's still a lot of head room here. As you know, we've been developing and implementing a number of initiatives to drive top line revenue, KDS, Car Side and now, Weight Watcher's. So let's do a quick update to each of those, first of all, KDS. Around a year ago, all company restaurants completed installation of KDS. On the franchise rollout has been aggressively underway. Less than 80 franchise restaurants were on KDS at the end of year last year and that number increased over 660 at the end of June. Doing the math for you, we have nearly 2/3 of the system on KDS as we speak and a continued capacity to add at a pace of over 100 new restaurants a month. We continue to validate the 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 are going up. Ticket times are being reduced and improved throughput is pumping incremental revenue into the peak periods.

With nearly half of the franchise restaurants adding KDS since the 1st of year, you can see the improvements to their comp sales and where is that coming from? It's driven from really, a more efficient operation particularly around peak periods. Now, to Car Side. On the Car Side front you'll recall we completed the company rollout in November of last year, and 315 franchise restaurants had implemented Car Side at the end of '03. That number has grown to 675 franchise stores at the end of June. And that's about 75% of the system, in terms of the stores that can convert to Car Side, and the pace accelerates significantly with our franchise, as they complete their KDS rollout. I think you can see the benefits of both KDS and Car Side in franchise comp sales results which have accelerated significantly. As far as the the mix numbers go, mix and company restaurants in Q2 this year was 9.4, and that's compared to 6.8 in Q2 of last year in company restaurants. In terms of dollars, over 4500 per week came from To Go. Up nearly 50% from where we were a year ago. To Go remains our fastest growing partner. We turned on media and company markets beginning in January and the franchisees have been turning on local media as they get their markets converted as well. We believe there's a lot of run way still in front of us on average weekly sale. But we know it's only going to be to be realized if with you allow the field field team to stay incredible focused on great execution around these important initiatives, allowing the optimization of these initiatives to plateau at 70 or 80% is unacceptable. I can't emphasize enough. It's about focus. It's about obsessive execution.

Although our CSI (our customer satisfaction index measures) for Car Side are running consistently 20% higher then in dining room which, by the way are continuing to rise as well, we're still not as solid as we need to be on creating a WOW experience for our guests every time at Car Side. I'll tell you what. Through continued sharing of the have best practices and continued discipline, we're going to get there. Now an update on the most recent initiative, Weight Watcher's. On May 17th we introduced our spring menu which featured the addition of ten new Weight Watcher's items. We 're not going to give a lot of specific mix numbers yet. It's still very, very early, less then 90 days into the rollout. We'll say that Weight Watcher's has performed better then it did in the test market. Guest feedback has been terrific and we received good initial trial, both from Weight Watcher's members as well as from health conscious America. We did distribute 7500 gift cards to Weight Watcher's leaders, and in the first five weeks, following that distribution, 65% of those cards have been redeemed. Several new items have already been tested so you can expect to see these on the fall menu. Around the advertising front, we started with a print media campaign featuring ads in over 20 magazines and then followed-up with national TV advertising in conjunction with the current salad promotion. Here's a couple of interesting notes around the Weight Watcher's beat. Our early weekend incidents a higher percentage then on weekends and that's consist with what we call the indulgence theory, that Weight Watcher's people and members and health-conscious people tend to exercise better discipline early in the week and allow themselves a little indulgence on the weekend. We 've also seen some regional differences with California having the highest order rate of any of the company markets. Now, we did experience a little bit of incremental labor due to the zero-tolerance policy on deviation from spec. It started at a couple of hours a day and now it's moderated between 30 and 60 minutes a day. We think this is a small cost to pay to maintain the strict quality standards to ensure we're delivering the points that we promised the Weight Watcher's member. And with additional trial, additional experience, I think we'll see this labor normalize. Since John's on vacation, let me give you a quick update on the marking activity. On a campaign front during the quarter we had the final four weeks of the steak and shrimp double feature which ran through the April period. For the next 8 weeks we featured the new honey, barbecue, Baby Back Ribs in all restaurants throughout the the country. At company markets we were priced at either $13.99 or $14.99. National advertising as you heard, used a parity version of the number one song in all of country music last year titled "I want to talk about me." This promotion, which featured new news was successful in driving traffic and Baby Backs are a permanent part of the core menu. As we walked into this, we believed the Baby Backs were considered a cost of entry in casual dining and the guests are telling us we were right. Baby Backs also provide us a high-end complement to our signature riblet product. Which, by the way, you can expect will be featured in an upcoming promotion, because, guess what? We have plenty of riblets. We 're currently in the middle of our fresh garden classics promotion which began on June 21st and concludes on August 15th. This promotion features two new salads, barbecue chicken and grilled steak. The Santa Fe salad and the signature, Oriental chicken salad. The in-store POP materials also highlight our baby back ribs, house sirloin and the popular, veggie patch pizza. The price points are consistent with the regular menu with chicken salad priced in the $7.49 to $7.99 range for a full salad, and steak and shrimp salads priced at $8.99. As we noted in the press release, these price points are lower then either the prior year recent promotions or current this-year promotions and so our July comps reflect a smaller checklist. So what does Car Side, Baby Backs and Weight Watcher's all have in common? They are meaningful, permanent, branded benefits that will continue to differentiate identification and ultimately, lead to greater preference and sustained growth.

Our initiatives and menu improvement have have put us in a good position to leverage the category leading spend in advertising with multiple messaging. Here's what that means. In some markets it's very possible that one might hear a Car Side To Go radio spot on the way home from work. You might see then, a Weight Watcher's message on television at 6 p.m., and tune in a Applebee's honey rib barbecue message at 8. This multiple messaging around the Applebee's brand will become a much more visible competitive advantage. In closing, we couldn't be more enthusiastic about the business momentum. And equally as enthusiastic about the pipeline of innovation that lies ahead. With that, I'm going to give to you, Steven Lumpkin.

Thanks, good morning, everybody. Again, thank you for your interest in the company. I've got a number of things to talk about today and I want to get right to the numbers for the quarter. I've also got some new News for you on franchise financing, some exciting stuff there. I'm also going to talk a little bit about commodities. I think we have a couple of data points to share as we think about '05 and then we'll quickly -- Quickly close my comments as we think about full year EPS. Now, let's trip through some of the numbers, company sales, were up 12.6%, to nearly $248 million. That was driven by strong comps of 5.5 and a capacity increase of 7%.

The capacity increase was due to us opening 31 stores in the last 12 months and that's that's an organic unit growth rate of over 8%. Adding to that capacity increase, were the 10 franchise restaurants we acquired in California. This year and that was offset by the loss of store weeks from the nine Atlanta restaurants we sold last July. Franchise royalties and fees were up up 12.6% to nearly $31 million, driven by great franchise comps in 6 1/2 and 64 openings in the last 12 months. This represents normalized capacity growth of approximately 5.5%, excluding the impact of franchise acquisitions and dispositions. Other franchise income came in at 3.4 million. 3.1 million of that relates to the insurance cap with the balance the services we provide to the franchise community. That makes total revenues in 282 million, up 12.5 during the quarter. System-wide sales increased 12%, again, driven by a strong system-wide comps at 6.3 and 5.7% increase in capacity with 95 new restaurants opened in the last 12 months. Net income was 28.2 million, versus 20.2 million on a reported basis last year. Keep in mind, last year's net income included that 5.6 million dollar after-tax charge for the Chevy's note write off and this year's net income includes the million and a half after-tax charge we took on riblets. Diluted EPS came in at 34 cents versus 24 last year, the EPS last year was an impacted by 6 cents due to the Chevy note writeoff and this year impacted by 2cents for the riblet charge.

You let's take some highlights on the P and L. First overall restaurant margin before preopening came in at 16.1. That was a 70 basis point reduction from prior year. The Major contributor was food costs coming in at 26.9 for the quarter. That's up 100 basis-points that we believe Q2 will be the high-water mark for the year. At the food cost line. The 500,000 dollar riblet write-off accounted for 20 basis-points as part of that charge hit food costs for the company portion of riblets. As we discussed previously, the addition of baby backs ribs to the menu pressured this line as the product lines more than 40% food costs. This added about 50 basis-points to overall food costs in the quarter. The remainder of the increase was due to higher commodity costs particularly as we promote steak, for the first four weeks of the quarter. I'll have a more comments on commodities in just a second. Labor came in at 32.7, up 10 basis-points. We did get 40 basis-points of leverage at the management and bonus lines, just off of nice higher sales volumes. This was offset by additional prepare time and a learning curve associated with the rollout of Weight Watcher's and some increase in dedicated To Go Labor we talked about previously. Both of these factors result in increase in hourly labor of of about 40 basis-points. It's important to note our Weight Watcher's incremental prep times have been improving as we get over the learning curve on making these products in the back of the house. We also had higher worker's compensation of 10 basis points. Management wage rates ticked up approximately 2.5 to 3, reflecting the excellent management retention and hourly wage rates were up approximately 3%. D&O was down 40 basis-points to 24.3.

We got about 40 basis-points of leverage due to higher sales volumes at the rent, -- repair and maintenance line and depreciation and miscellaneous line showing improvement. We also saw a 20 basis-points improvement in property and liability insurance, offsetting leverage was higher To Go packaging with which was up about 20 basis-points. Cost of other franchise income included the 1.8 million of the riblet write down that was allocated here based on historical usage of the riblets by the franchise community. G&A came in at 8.8. That was down 30 basis-points. Due to leverage we are achieving on -- due to higher sales and by leveraging sales from the franchise acquisitions. Offset by a little bit of higher staffing costs. This is the lowest G&A we've seen in five years as dollars were up 9% compared to topline growth of 12.5. As compared on a sequential basis to the 1st quarter of this year, dollars were down due to timing of our annual GM conference held in March. We expect full-year G&A to be in the low nine's range as we previously stated. As to other income, excluding the Chevy's charge from last year, total other income was up 585,000. That breaks down to net-interest expense being up 365, and other income was up 950. So, this other income was against a prior year number that was lower then the usual run rate of 200 to 300,000 on this other income line. Included in other income for this quarter was about 550,000, resulting from revised estimates surrounding common area maintenance or CAM, and property taxes, for prior years for our leased real estate portfolio. Tax rate came in at 35 even, versus 35.8 last year, that's in line with guidance.

A quick look at the balance sheet and I'm going to hit on some of the larger larger fluctuations in some of these accounts. Accounts receivable were up 9.2 million. Due to increased royalties from those great franchise sales and the addition of Baby Back Ribs to the supply chain as we we are a supplier of this product. Inventory up 11 million due to building inventory in back ribs, shrimp and riblets. Other intangibles net, this is a new item on the balance sheet, came in at 5.8 million, reflects the acquisition of the lease rights for the six Ground Round properties we acquired in the quarter. Goodwill increased 11 million and that's a a result of our acquisition of our restaurants in Los Angeles. Accrued income taxes increased by 21 million as we made limited tax payments in the quarter as we anticipate the benefit from some recently implemented tax strategies, this is a cash timing issue and does not impact our tax rate in the P&L. The debt was up 23 million from end of year last year due to stock repurchase and acquisition activity. Debt to cap came in at 8.3, shares outstanding at the end of the quarter were 81.9, of course, that's split adjusted. And with regard to share over purchase in the quarter, we bought back 21.2 million dollars worth of stock and that was an average price of $26 and a penny. Year-to-date purchases have totaled 53.2 million, average price of 2538. At the end of the quarter we had approximately $46.5 million remaining on the authorization. Let me brief you a little bit on some exciting financing programs we rolled out to the franchise partners in the last 12 months. We really think these will help to accelerate growth in the years to come. We announced 3 facilities to support the growth of the system. First of all, last fall, we introduced a new facility to support implementation of the sales building and technology initiatives. This facility provides very attractive lease terms for franchisees to place KDS, Car Side To Go and other technology in their restaurants. We have provided no corporate guarantees on this lease facility. Now, the second facility which we rolled out in January to our franchise partners is a 75 million dollar facility in partnership with GE franchise finance, to provide capital and franchisees in support of the new remodel program. This facility carries a limited corporate guarantee. Finally, we announced in June, a $250 million development facility to support the growth of the system over the next few years. This facility provides significant dry power to our system for new store openings and brings City Capital, a major lender, to partner with our system. This facility also carries a limited and declining corporate guarantee. Now, strategically, we developed these facilities in response to the dynamic changes in the franchise finance marketplace over the past few years, we've seen a real concentration among lenders and the exit of several high profile players either through M and A activity or by leaving the space, they create visible access to a variety of financing to our franchisees-- at a time when we're asking for unprecedented levels of capital formation in our system. The Limited corporate guarantees were provided to make the financing available and eliminate the risk of credit concentration for some of the larger franchisees across a shrinking lender base. As part of our process, we approve all franchisees for inclusion in the corporate guaranteed portion of these facilities and we do not expect any material impact on our financial statements as a result of providing these limited guarantees.

Now, before I close, with the EPS guidance for the remainder of the year, let's talk about the Applebee's's view on the commodity's market. There's recently been negative sentiment on outlook commodities as we contemplate '05. We 're just now starting to negotiate contracts that is extend to '05. Here's two recent data points. We just completed our baby back rib contract which runs through next June. Our landed cost to the restaurants for back ribs is going to be flat over the next year. Also, based on recent negotiations and agreements we expect dairy will be favorable to flat for us in 2005. These two data points do not represent a total view of what is to come and they represent a small part of our overall spend. But each operator in our space will have different commodities cost dynamics in the future based on what's happening to their individual menus and the specifications for their unique protein items. In our case, menu improvements and innovation are driving our costs outlook more than pure cost inflation. Commodities inflation is playing a roll but the lead roll is filled by the best menu we've ever had at Applebee's. That being said, there is still high demand for all kinds of proteins and we don't think the trend will turn around quickly. Our view is cautious about the future but look to our own unique situation to draw conclusions about what will happen in 2005. As we know more about beef and chicken we'll update you on that outlook. In closing, I won't repeat the guidance in the the press release but I'll say we expect full year EPS to be in the range of $1.34 to $1.36, that does include the two-cent charge charge we took on riblets. That's the end of my prepared remarks. Operator, let's open it up for questions.

Thank you, sir. 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 cue, you may press the pound key. One moment, please. Our first question is from John Glass, from CIBC World Markets, your question, please?

First question is, in just as a more general comment on mix, the number in light of the number of initiatives you've got going on from Weight Watcher'sto the Car Side business, can you talk about how the day parts have shifted? Have you seen the totality of mix shifting more towards evening or has it been more balanced. And in the week part, are you getting a more stretched-out week then you had previously.

Hey, John, good morning, it's Steve. I think we haven't seen radical shifts in what's happening, given all these initiatives. Certainly, I think as Dave mentioned we're seeing some early-week strength with regard to Weight Watcher's, and the kind of, you know, eating healthy early week but indulging on the weekend. That's the only thing we can read that significant to talk about.

You mentioned that your riblets are something that you sell to your franchisees. Can you, one, talk about, is there any other product you sell to franchisees and quickly recap where the revenues are booked and then, is there any margin in that product to you?

Sure. We provide three products to our franchisees, riblets, back ribs and shrimp. They don't flow through the P and L because they're not required to. We take no margin on this business, I think this is something, that culturally, with our franchisees, we inventory this product to ensure continuity of supply and make sure we can rationalize the distribution on the products and protect our pricing. But we do not have a margin in there. We do include in the landed cost of those products, the cost to inventory those items as you would expect and inventory carrying charges so we don't expect the share holders to pay the freight, if you will, for the pleasure of us inventories those items. So when a franchisee receives those products like any other product in the supply chain they'll pay what everybody else pays and the only difference is their unique freight situation, depending on how much freight it took to get to their back door.

Got it. Thank you.

You bet.

Our next question is from Peter Oakes from Piper Jaffray. Your question?

Good morning. A couple of noteworthy events that are going to be unfolding here in the second half with the Olympics and the election. I was curious, what, if any, will they play as far as your advertising plans for a second half?

Hi, Peter. This is is Dave. Let's touch on the Olympics first. Relative to our strategy around Olympics, first of all, from, as you probably know, from a programming standpoint, outside of the Olympics, it's really a low-rating time for television in general. We have elected to be off air nationally during the Olympics, conscious decision, and to support the accommodation of our promotion around ribs. And our Car Side, with local television during that period in time. Relative to the part two of the election, I think that's always up for grabs a bit. Bottom line, we're locking and loading on the strength of our promotions and the fact we're back on national television at that time.

It's ribs or riblets.

Riblets.

Okay.

As I said earlier, we have a few of those.

Yup. And as the system continues to prosper and you're seeing category leading comps, is there is a potential down side, there's some concerns, I suppose, out there, that at some point you start knocking up against the wall or the ceiling as far as capacity constraints. I was curious. Do you parse, on the company side, do you parse the portfolio as to the top 10 or 25%, as far as AV units and are they keeping up with the system, as far as same-store sales gains? You get where I'm going with that?

I think I'm with you, Peter. A couple of thoughts, let me start with capacity. We have, today, still over a couple hundred to $3 million restaurants, as we said before, there's a number of restaurants that exceed that, all the way up to our, you know, New York locations in double digit million dollar years. The Interesting part is our top tier restaurants, continue running great comps. So there's no evidence that at 3, 3.5 or 4, we have people bumping their head on the ceiling. Even the high-volume restaurants continue to lay down good numbers. The Other thing we're mindful of here, is how do we keep our edge. I said earlier, that we spent a lot of energy here the last 18 months in company and now, franchise, letting out some really important initiatives around sales driving. And we're just going to be be methodical about being sure execute these things at 100% here. There's still a lot of head room with KDS and Car Side. Shame on us if we don't optimize what lies in front of us here.

I Think, Peter, if the franchise partners were here, they would say, theres a lot of room ahead in our own organizations, we're in the process of chewing and swallowling these initiatives. We haven't started to digest them yet. So, our franchise partners really look to the balance of the year and all next year, to really do that. And so, this is, I think, we're very thoughtful of -- We've asked the franchisees to put a lot in their system, individually, and in collectively and now we're all about optimizing and it provides us a nice timing on the calendar for us to now, turn our efforts to how we're going to continue to grow in the back half of '05 and into ' 06. And that's the focus of the management team for a while with regard to our '05 plan. The '05 plan is baked -- We presented to our franchisees in January. We know exactly what we're doing on television next year. What we're going to run. I think some of Dave's comments today, our ability to put multiple messages in front of the consumer and the consumer to react to that is all stuff that's ahead of us.

Great, thanks a lot.

Thanks, Peter.

Thank you. Our next question is from David Palmer from UBS, what is your question, please?

Hi, guys. After 90 days, are you starting to get a sense of repeat purchase for Weight Watcher's menu items? I guess, in particular, are you seeing Weight Watcher's sales build as a percentage of your mix over time? Maybe you can give us some color as to, perhaps, what's that doing to the composition of your guests and the size of your parties? Is that what you expected it would do.

David, it's Steve. Good morning.

Thanks.

I think we'll say on Weight Watcher's, I think this is really our style from a disclosure standpoint. We were really, 90 days, we know, does not make a trend. We 've gotten, you know, great trial from these users from the Weight Watcher's community. We don't have a good sense of the seasonality at here. We don't have a good sense of when Weight Watcher's launches their initiatives how it impacts our business, there's a synergistive effect of these two brands working together. That's not visible to us yet, the synergistic a affects. What we want to say and what Dave spoke to, is we're very pleased. Pleased with the partnership. Pleased with the acceptance of the products. You know, in the marketplace. We 're pleased with how the Weight Watcher's leaders and others, what they're saying about this and what the Weight Watcher's numbers are saying and how they're responding and we're also very pleased with people to come in that aren't members of Weight Watcher's and look at that part of the menu, so, I think another factor here, which is, David, it's difficult to measure. But we know we're also on there with salads. We know salads appeal to health-conscious eating and also, to the Weight Watcher's and,that's a factor in there. So we really want to put a little bit of room here, you know, in terms of the calendar where we, really get a chance to see how things seasonally will adjust before we go too deep on this. Don't take away from that that we're not incredibly enthusiastic because we are.

David, this is Dave. I simply would add to that, as we walked into that is one of the of the things we're excited about is the incrementality. Unfortunately, a lot of the Weight Watcher's members were limited in their dining-out option. We've seen a lot of enthusiasm from the Weight Watcher's members and they're passionate about their food. And anecdotally, we see some good trial return and we hear that at the stores and nice comments about how they feel about taste and price-value.

Thanks.

Thank you. Our next question is from Andy Barish from Banc of America Securities.

Hi, folks. Maybe you could give us some quick update on sort of supply chain initiatives. It's been a multiyear effort and obviously, a very successful one, bringing the franchisees into the fold and taking advantage of purchasing power. I mean, it sounds like with ribs and some other things that, you know, have been upgraded on the menu, in general, those are going to be higher food cost items. You've had supply chain to offset that. Is there still more room to go there to kind of keep that balance in place over the next, say, 12 to 18 months?

Andy, it's Steve. I'll give you a cautious answer here. I think that David and his team was on the line, we're still, maybe, mid-point in the game in terms of harvesting opportunities that are out there. The Environment that we're in, however, causes any supply chain to get much more focused on current negotiations with vendors, because, this is an unprecedented environment. We still they that we've got big opportunities to manage freight. We have an on going initiative to rationalize our distribution network, which isn't totally where we would like it to be. We 're still not through all of our ingredients in terms of rationalizing the number of suppliers we do business with. Because of the breadth of the menu and we don't have a big concentration and because, when we sit down with our vendor partners to renew agreements, the system's grown 12%, we have another 250 to 300 million dollars of sales that we can leverage. We 're in kind of a unique situation. And so, I think the -- Your comment on higher cost proteins, we're very mindful of that. We think that's consistent with how we think about evolving our menu. We think our guests and as casual dining evolves, we think a higher quality proteins are going to be thing that is represent an opportunity for us. So, I think this is -- All this is very consistent with how we think about bringing great food to our guests. And we're thoughtful about what '05 looks like. I'll just reprise what I said in my remarks. I think every Operator is going to be different, though. And we all have different specs and it's difficult to wash everybody with the same brush. We 're not as negative about '05 or not as concerned, perhaps others are in our space we but we're certainly very thoughtful of it.

Andy, this is Dave. Since you mentioned franchisees, we couldn't be more pleased with the partnerships of the franchisees as we take on the initiatives like reducing SKU's and leveraging by reducing the number of distribution centers. This partnership is a key part of success to Steve's point, we're about mid-way along where we'd like to be with a temporary distraction here on current commodities.

Thank you, our next question is from Robert Derrington from Morgan Keegan & Company.

Steve, a question about labor costs if I could for a second, during this past quarter, you know, looking at the queue, there's a little bit of commentary about how you had lower management incentive compensation in this past quarter. Given how strong sales were, is there there something there we need to understand about what's affecting that?

Bob, not necessarily. I think, you know, we've got our comp plan is -- It's like a lot of them, it's heavy top-line bottom-line oriented but it's also balanced because we have guest metrics and people metrics in there, too. I think we, given, if you look at our P and L here, given the dynamics with the P and L with regard to flow-through, I don't think we achieved necessarily all of our flow through goals and you can see that really, in the bonus plan in the middle of the P and L. Our people metrics are in great shape. Our guest metrics are in great shape. Sales were good. I think if anything, a lot of times our bonus plans are based on performance against budget. And I think some some of the costs surrounding Weight Watcher's and some of the rollout costs and some of the learning curve which Karen and her team have done a great job getting around.

Is it reasonable to expect increased leverage in this next quarter, given that you've rolled out Weight Watcher's and Car Side and all the company stores and we should see some benefits there?

I think, Bob, if you're just isolating on the labor line, on leverage, I think our -- We maintain our point of view on overall margin somewhere to last year. I think it's probably a little premature to talk about a leverage. I think we're mindful, sequentially, here, we're seeing hourly rates pick up a little bit. Not things to be real concerned about, but on a trend basis they're up a little bit. And we've got great management retention. So, I think our expectation is that we'll leverage on the hourly side, expenses, some of the incrementality, which is rubbing Weight Watcher's which we're seeing. We 've had a little bit of investment where you expect leverage, uncertain as to what will happen with regard to some of the wage rates. We really need to have another kind of quarter lap to see how we think about that.

One last question, if I may. Around economics, the unit economics of the business, there's been a lot of, you know, talk about higher construction costs, basically, the, you know, cost of building new restaurants is climbing. You know, lumber, drywall, concrete, steel, all these things. When you look at your business, the cost of building restaurants, do you see, you know, listening to the commentary about higher development in the pipeline, particularly on the company side, is it, you know, should we anticipate there may be some reduced -- in the hundred- plus restaurants you typically open, a shift more towards company development versus franchise and how does that, you know, also get affected by the economics of the business?

I think, Bob, the -- We're in an environment here where, I think it's well publicized on what's happening with steel. Some of those things are moderating somewhat. There's no question that there's some inflation there. And at the end of the day, it's all about returns that you can get on a particular deal. And we, you know, we look at development. We know our franchise partners have got to get returns. If they can't get returns they can't get lending. I think if you look at the franchise finance programs we've put in place, just between the GE and the City Capital programs, we're looking at excess of $325 million that lenders have committed to put to work in the system. The lenders are pleased with the returns they're getting in their investment at Applebee's and our franchisees and our building pipeline, as Dave mentioned and the company. I would not expect we'd see a disproportionate that growth rate ahead between the company and the franchisees but I would expect that the company, as it has done sequentially, will accelerate its basic growth rate. We 're above 8% this quarter. There's no reason to expect that that's going to slow down. So, where we've got a very healthy pipeline. If you look at the returns, our returns aren't slowing down either. So, I think it's manageable in this environment. We can manage the costs. Manage the returns and manage the growth.

Bob, this is Dave. Just as we have the work that David Parsley does in supply chain, where, you know, some of his work to offset commodities pressure by leveraging the system and so forth, we've got -- We have a power house of a team around facilities, design and construction, that are also constantly looking for innovation around new equipment, new design and new layout. And quite frankly, mining some great practices from some of the more aggressive franchise developers in terms of what they're doing with building. We try to the do a nice job with offsetting the inflation costs with building and design.

Thank you.

Our next question is from Janice Meyer from CSFB, your question?

Hi, it's Janice, how are you.

Hey, Janice.

Two questions. The first is on Weight Watcher's. There is, I guess, talk that Weight Watcher's is going to have a hybrid program compared to their traditional program. When you change your menu items, I mean, they're not necessarily on the same schedule you are when they come up with new programs. Will you be moving in lock step with them whenever they change their items? And does the new items that you're saying on your fall menu, does that reflect this change that's going on at Weight Watcher's?

This is Steve. We can't comment on what Weight Watcher's will do. I think what we can say is our product development cycle on menu items can be measured in months. And these new items really reflect the evolution of our initial learning coming out of Weight Watcher's. Now, with regard to your question about how we move together strategically, that's the essence of a longterm partnership and we're absolutely committed to adopt and integrate as Weight Watcher's faces the market differently. Offers innovation. We will integrate that into our menus and our service approach as fast as we can. So, I think we're Weight Watcher's is a great partners of ours and we're excited about the road ahead with Weight Watcher's.

And secondly, on ribs, I was a little surprised. Nice that you said your rib prices are flattish for next year. I honestly would have thought with you entering the rib market and putting more demand on Baby Backs that rib prices might actually be up a little next year. Was there -- Would you say that overall, you would expect the market to be up next year? I don't know if there was anything special in your contract this year, since you were late, were you paying maybe, higher price this is year on ribs? Or do you think that's general market?

I think -- I don't want to comment on what other Operators are going to be able to negotiate in their deal. I think the value of the introduction of this product in the Applebee's system has been has been respected by the suppliers and, I think the strategic nature of what we're trying to do with this product has been recognized. I would say that, you know, when we entered the market last year, we drove the market. No question about that. And so, I'm not forecasting that that would be the landed cost of the back of the restaurants would be something that we would see flatish for the rest of the protein complex, because we we haven't negotiated anything yet. I would rather, Janice, as you know, talk about deals that have been fully perfected, negotiated and signed, because those are real, instead of worry about what's going to happen in the future. These markets, these markets can be dynamic. Both on the upside and on the down side.

Sure. But given, just in general, my lack of knowledge on the baby back ribs, did the increase in demand for the rib product product you have put on market, do you think that has been met with a commensurate increase in supply?

You know, Janice, I which which wish I knew the answer to that question. I don't. Our protein buyer here, at the office will know that, but I don't. So, you know, I think, you know, there's certainly -- Whenever you have 1600 plus restaurants and you're introducing a product the cycle time on hogs is pretty fast.

Right, okay, thanks.

Thank you, our next question is from Bill Davis from SunTrust, your question, please. Hi, good morning.

Good morning. I was just wondering, you kind of answered it a little bit about Weight Watcher's and salads, I was considering more of a core menu item. When you look at ribs, do you think you're driving a new customer in, maybe a higher demographic customer then you have in the past? And how do you capture that customer? With Weight Watcher's, just, I guess, it's fair what you said about about kind of driving some additional new customers in there and those, I guess, might be more in in line with your typical demographic. I was wondering if you could address that.

On the Weight Watcher's pieces we said said we were really kind of of dialed into the potential incrementality there and that's a new guest and that's a higher-end guest. Both Weight Watcher's and ribs -- It appeals to a higher demographic. In both cases, I reiterate it's early enough we haven't had a chance to dissect that. Intuitively, it would in indicate we're adding a higher-end demographic in the dining room then we had prior to those products.

Thank you very much.

Thanks, Bill.

Thank you, our next question is from Jason Witner from STN Midwest Research.

This is Brad sitting in for Jason this morning. I've been seeing some some of your all-you-can eat riblet, promos going on this week. Is this a normal event?

We did provide both the franchisees and company operations an opportunity to do an early-week all you can eat riblet. Certainly, we were able to open that when we realized the inventory situation allowed us to do that. We 've had that request, because of the popularity of an early-week campaign. We 've had to sit on that request for about 18 months, two years now. Constantly bubbled up where we've had franchisees and company Operators saying, may I, may I, and our response is no, because we are have to make sure we have enough. We need to be sure we have adequate supply for a major promotion and with the event of the last 690 days we were able to respond by opening that up. They are certainly related, Brad.

Didn't know if you had any reason why the franchise average weekly sales and comps were higher than the company restaurants?

Well, the A-list for company and franchise year-to- date is about about $600 apart. They are almost so close it's like a sandwich, how close they are together. So I think what you're seeing here is -- And you saw it in the comps is the franchisees are benefitting from their early and rapid adoption of Car Side To Go, Weight Watcher's and KDS. And that's the whole story.

Okay, makes sense, thanks.

You bet.

Thank you, our next question is from David Shamus from Raymond James, your question, please?

Good morning. Steve, I know you mentioned in your prepared remarks you would give more details on the beef and poultry. On the last conference call, if I recall correctly, you mentioned you think the beef market will get slightly better in the back half of this year and much better in -- Actually, I'm sorry, the back half of '05 and much better in '06. Given your current outlook, do you still think this is a reasonable view?

Yeah. I think if I go back and look at my remarks, the outlook on beef at the time was a flattish to slight up market in '05 with some improvements in '06. I don't think we're necessarily changing our view on that. But I think it's like all things, and I want to really make sure that I'm press this point. There -- You really need to take a look at a perfected negotiated deal on beef or chicken and see where you end up up based on your spec and how you decide to enter the market. That's largely unchanged and I think we'll have a much better sense here, certainly, by the end of the 3rd quarter going into the final quarter here as we contemplate a pretty major beef buy.

Okay, great. Just going back to that that new line item on the balance sheet, I was wondering if the other intangible asset line includes the franchise interest rights in previous quarters?

Yes, it does.

Thanks, David.

Thank you. Our next question is from Michael Smith from Oppenheimer and Company. Your if question, please?

Good morning. Couple of questions. Your guidance for the year for comps is 5%, yet the first half you're up 7%, which would imply the second half of the year you're expected to be up 3%, is that caused by an anticipated decline in traffic or caused by the fact that you're not going to have the high-priced items in your promotional items in the second half.

Mike, our guidance is at least, 5% for the full year and 7% for the first half. We said repeatedly we don't think that's a sustainable comp expectation. We 're conscious of the fact we do have more difficult comparisons in Q3 and Q4, so a 5% expectation for the full year is a prudent guidance, especially with what we've seen happening here throughout the industry.

And is the slowdown between July and June, is that caused by the shift due to the salad promotions.

If you look at the traffic, traffic in July was stronger in the company was stronger then it was in June. We got less of a mixed benefit from the salad promotion.

Is there going to be any margin impact from the salad salad promotion? I guess the margins will go up because ribs are more expensive.

I Think the high-water mark for food costs costs was probably Q2.

Do you have a figure for system-wide sales in the 2nd quarter.

In our 10-Q in our press release you can add the company and the franchise revenues together, but we cannot disclose per SEC guidelines.

Fair enough.

Thanks, Mike.

Thank you. Our next question is from Allen Kim from McDonald Investments, your question, please.

Hi. Just wanted to drill down a little bit on the advertising costs. I understand that the first half you had higher advertising versus last year. Can we expect to see that throughout the rest of the year, or are there things that work that will drive that down, especially considering the Weight Watcher's is going to be doing their own advertising?

Yes. You look at the spend the way last year shook out we were more heavily weighted in Q4 versus Q1, particularly, because we did the rollout of Car Side. This year is much more even spend by quarter on the full-year number of about 4% for the combined local and national spend.

Okay. And if I may ask another question. For the whole year, I think you in the press release you said the restaurant margins were going to remain even with last year.

No, we have said similar to last year.

Okay. Similar to last year.

Is this Allen or Dennis.

This is Allen Kim.

Sorry, Allen.

And Fourth Quarter, I understand, you're going to have benefits due to the extra week?

No. There is no extra week. There's -- There's a few things that are flying around us. This is the 53rd week. You don't have a 53rd week until 2006.

Is that right?

Right.

Okay. That's all I have.

You bet. Operator, let's take one more question.

Our final question is from Howard Penny from FBR, your question, please?

Thanks very much. I have two specific questions on Weight Watcher's and one kind of big picture. How many people is it that are actually working the back of the house for those extra two hours, what are now 30 and 60 minute incrementals. On the gift certificates, whatever they are, what were they for and when did they go out? And Steve, I think you said, your words were you didn't want to get too deep on this, referring to Weight Watcher's and not wanting to give -- Is it give too much information is what you you didn't want to get too deep on or is this Weight Watcher's program program something you're definitely committed to? Thanks very much.

Hey, Howard. Let me answer that. The "no go too deep" was on a disclosure standpoint in the details of what this is doing to our business. This is a longterm partnership and absolutely, we're 100% committed to it. I didn't want to leave any impressions about that at all. I think I'll let Dave talk about the two first questions, Howard, on kind of the number of people we're talking about. And then on why we use the gift card. Or Carroll can talk about about why we use the gift card.

I 'll do the people piece and let Carroll talk about the gift card piece. I think less in terms of incremental bodies and more in terms of incremental hours. We talked earlier about the discipline around ensuring that we delivered this product flawlessly to its point total. So, it required a little bit of a different attitude about how we prepped these products. Where we stage them in the walkin and how we isolate the product from the back of the house. In an interesting way, it simply said there's something new the prep cooks need to do as they arrive in the kitchen in the morning, in some cases that translated to arriving earlier to ensure that got done well or staying after after lunch to make sure we made a cross check back through this to be sure that product was handled properly. Less about incremental bodies and more about incremental hours. That's starting to normalize better for us. Some markets feel back to normal. On average, we're 30 to 60 minutes a day.

Howard, on the gift cards, our strategy is the Weight Watcher's are the leaders in these meetings. Our strategy was to get them into the restaurant to see what was happening. We sent $25 gift cards to the leaders for the 7500 people we sent them out to. They were specifically named gift cards. They weren't normal. When a leader came into the restaurant and used the gift card, a manager could recognize them, talk to them, see see how their experience was and make that a one-on-one experience for the Weight Watcher's leader. That's an important strategy for us in maintaining the longterm growth of this program.

When did they actually go out?

In conjunction with the launch.

So it's been 90 days?

We've given you the redemption rates for the first five weeks. I'll get more redemption date here quickly.

Thank you.

I think we're at a wrap here. Thank you all for dialing in and thank you, as always, for your ongoing interest in Applebee's and we look forward to seeing quite a number of you you in September.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may disconnect and have a wonderful day!