Dine Brands Global Inc (DIN) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Applebee's International third quarter 2004 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star then zero 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, Miss Carol DiRaimo, Vice-president of Investor Relations.

Good morning, and thank you think for joining us this morning. I'd like to note, this call is being broadcast simultaneously over the internet.

A couple of calendar items to note. Comparable sales for the November fiscal period which ends on November 21 were released on Monday, November 29. So you can all leave early to enjoy the Thanksgiving holiday.

A few timing items also to note for the fourth quarter. Halloween moves from Friday last year to Sunday this year which should be a slight positive. Thanksgiving occurs in the December fiscal period as it did last year and as we noted in our press release last night, Q4 and December comparable sales will be negatively impacted by the shift in Christmas Eve and Christmas Day from a Wednesday-Thursday last year, to a Friday-Saturday this year.

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 franchisees to obtain financing, the continued growth of our franchisees and our ability to attract and retain qualified franchisees.

The impact of intense competition in the casual dining segment of the restaurant industry and our ability to control restaurant operating costs which are impacted by market changes, minimum wage and other employment laws, food costs, and inflation.

You should review our form 8-K filed with the SEC on February 11, 2004, for important information about factors that could cause actual results or events to be materially different.

With me today are Lloyd Hill, our Chief Executive Officer, Dave Goebel, our Chief Operating Officer, Steve Lumpkin, our Chief Financial Officer, and John Cywinski, our Chief Marketing Officer. With that I'll turn it over to Lloyd.

Thanks, Carol. And good morning, everyone. Thanks for joining us.

I'd like to share a couple of brief thoughts with you with you and then I'll turn it over to Dave. First I think it's become evident that Applebee's is not immune to some of the factors affecting our economy and our segment, and I'm not going to go into those because I think we're all painfully aware of them. I'll just say we're not here this morning to make excuses, and we're not happy with these results.

Now, having said that, I do believe we are positioned more favorably than anyone else in our category and that the strategies that we talked with you about last month in Kansas City are absolutely the right strategies. You will not see us with a knee-jerk reaction based on these short-term results.

Our focus continues to be on perfecting and consistency of execution, and remaining nimble in this particular environment. With that I'm going to turn it over to you, Dave.

Thanks, Lloyd. Good morning, everyone.

You know, considering this environment and the impact of the current economic conditions, it's not only prudent that we stay the course with some solid strategies here, it's critical that we continue to drive operations excellence to even higher levels. And we plan to do that.

Let me share with you a brief snapshot of some of our customer metrics. We're seeing sequential improvement across all of the metrics which indicate a healthy solid business in general. In September, CSI, or our Customer Satisfaction Index, topped 50% for the first time ever and in a nutshell on a 1 to 7 scale with 7 being extremely satisfied over 50% of our guests respond with a 7 when they were asked to rate overall satisfaction.

The brand tracker attributes that we shared with you when you are here in Kansas City, also remain very strong in the third quarter particularly around food, value, and service and the strongest attribute was likelihood to visit. Where we not only outperformed the grill and bar segment but all the casual dining competitors measured through this brand tracker across 30 markets in the country.

This guest-measured performance along with our internal operations reviews gives us the confidence that nothing's broken, that we're embracing the people that are coming to see us, and it supports staying the course or as Lloyd said, remaining nimble, particularly if the external environment stays tough.

Couple of brief initiative updates. Our kitchen display system is now installed in over three-quarters of the system. The revenue improvement from the reduced table turn times is clearly showing up in our franchise system as they continue the rollout. And I'm sure you've seen that in their comps.

On a company side, we just released a comprehensive, hard-hitting, Best Practices CD and some new reporting enhancements to our company restaurants, and we'll be delivering that same package to our franchisees next week at our convention.

On both sides of the house, there's still an additional sales list in front of us here, around KDS.

Let's move over to Carside. On that front, we're closing in on 1400 completed conversions by the holidays. And a reminder, given the 8 to 9% that are facility constrained, that leaves only a handful of conversions for early Q1 as we prepare for network media in '05.

The bottom line is we're right on track with that plan.

From a guest measure standpoint, or Carside CSI, our overall satisfaction is running about 10% higher in Carside than the impressive 50% I referred to in the dining room measure.

Let's take a look at mix. Mix in company restaurants in Q3 was 8, 9, versus 6, 6 a year ago and although that 8, 9 lags the back-to-back 9, 4s that we saw in Q1 and Q2, that's a result of the front loading and advertising we did in company restaurants and the effect of some Carside seasonality.

But here's the deal. With continued focus and stronger execution, the October period bounced right back with an impressive 9.6% mix.

The bottom line is we're going to own this business in casual dining. Our 1600 locations, our marketing and our disciplined execution are really the keys to success here. So why are we so confident?

Off-premise continues to show strong growth in our industry. And we've talked a lot about Carside. But it's still early for us. Only 22% of our dining guests have tried Carside and our research continues to validate strong incrementality, in the 80% range. We're just now putting a wrap on the updated Best Practices, as we've done with KDS.

And this was a great one. The wireless handheld payment device is in test, and it's going extremely well. Our operators and our guests are excited about this additional convenience and this technology's going to give Applebee's Carside another significant competitive edge.

And with the combination of a direct mail drop here in Q4, John will talk to you about that in a moment, and the introduction of network television in '05, there's a lot of revenue growth still in front of us and I'm going to say again, we intend to own this business in Carside and casual dining.

Just a few brief thoughts on developments before I hand it to John. As we shared with you at the conference we have increased development plans with our company restaurants to open at least 32 restaurants this year, a growth rate of more than 8%. That will increase to more than 9% next year.

Our company pipeline is as strong as it's ever been with greater than 9% already approved and additional opportunities coming forward from the acquired Ground Round sites, the Southern California territory acquired from our franchisee earlier this year and now the addition of the Memphis, Tennessee market, which will be developed as a company market. Development from both the company and franchise is on really solid ground.

And with that brief update, I'm going to give it to you, John.

Thanks, Steve and good morning, everyone.

I'd like to recap the marketing activity for the quarter and provide some perspective on our near-term plans.

Back in July we started the quarter with a very successful Signature Salad event, including some sustained support at the time for both Weight Watchers and our new Baby Back Ribs.

July comp sales were up 5.5% on top of 3.9% from year ago.

We followed Salads in mid-August with a 7-week all-you-can-eat riblet promotion. As discussed, this program coincided with an abrupt category slowdown. Sixteen days of the summer Olympics and a self-imposed three-week advertising hiatus. We believe these, along with other external factors, resulted in the August-September performance that fell short of our expectations.

We are currently in the midst of Skillet Sensations, as you heard at the head of the call, which began October 4, featuring four different Skillets at a lower price point than last year's very successful Take Two event in the same time frame.

We also recognized, heading into the year, that October represented the single biggest hurdle we faced. With last year's comp sales up 6.7%, we're encouraged by October's progress, given the current environment.

And with the World Series now over, thank God, life will get back to normal this weekend for our New England and St. Louis restaurants which do account for about 25% of our company revenue.

Now, in restaurant this week is our fall menu featuring four new items including two new Weight Watchers entrees. As outlined in September, Weight Watchers sales mix remains in the 5 to 8% range as we move through the current low season for health and weight loss activity and we really don't expect to see incremental trial again until about January or February when health and weight behavior is at its absolute peak.

In keeping with our pricing strategy we've implemented a planned 1% increase with this menu, bringing our full-year price increase to about 2.5% in company restaurants, consistent with what we've seen in franchise restaurants as well.

By comparison our past three year pricing action remains well below that of the consumer price index, food at home, food away from home, as well as reported increases by most of our direct competitors. And on the to-go front, we'll continue to leverage consumer learning to be smarter and to be more efficient as we evolve here.

As an example, the Carside direct mailing Dave referenced will target a very specific demographic within a three- to five-mile radius of most of our company restaurants. The mailing will educate our guest on the components of Carside they find most relevant and provide the tools necessary to maximize awareness, trial, and repeat visitation. This learning will prove extremely beneficial as we approach system conversion and national marketing support next year.

With respect to the future, we just concluded one of the most productive meetings of our franchise marketing council last week in Chicago. In this meeting we once again reviewed in great tactical detail the entire 2005 marketing, menu, media and advertising plan with our franchise partners. And we fine-tuned that plan for maximum performance next year.

So as we look forward we remain confident in our plans, even in a tough environment. Our brand is extremely well-positioned, our value proposition is sound, our consumer insight, frankly, is better than ever, our '05 pipeline of targeted marketing and targeted menu innovations is full, our performance continues to lead the category, and probably most important, our franchise system is unified behind our strategies.

And as we discussed at the recent analyst conference, our national media investment will provide a meaningful competitive advantage in 2005. So with that, I'll turn it to Steve.

Great, John, thanks. Good morning, everybody. Thanks again for your continued interest in the company.

Let's take a look at the numbers on the quarter and then I'm going to update guidance here for Q4, remainder of the year.

Now, company sales were up 11.1% to 247 million, that was driven by comps of 1.1% and capacity was up 10% at the company. Now, the company opened 32 stores over the last 12 months, and that's organic unit growth rate of over 8%.

And adding to this capacity increase were the 10 California stores we bought in April, and then that was offset by the loss of store weeks from the sale of our nine restaurants in Atlanta last July.

Now, franchise fees and royalties, they were up 9.1% to 30 million, driven by strong franchise comps of 3, 1 with 73 openings in the last 12 months and that set capacity growth up about 6% excluding the impact of our franchise acquisitions and dispositions.

Other franchise income came in at 3.9 million, 3.5 million of this relates to insurance captive which we've discussed previously, and the balance is related to services providing -- provided our franchise partners, principally around IT.

Total revenues were 281 million, that was up 11.1% during the quarter.

System-wide sales increased 9.2% and that was on system-wide comps of 2.7. And that's a blended 7% capacity growth with 105 new restaurants opened in the last 12 months.

Net income came in at 28.3 million, versus 25.6. That was up 10.5%, EPS came in at 34 versus 30 and that was a growth rate of 13.5.

Now let's hit some points on the P&L. Overall restaurant margins before pre-opening came in at 16.5. That was a 20 basis-point improvement.

Now, food costs came in at 26.3. That was up 60 basis points and I think we continue to see here increasing pressure due to higher commodities costs, primarily in chicken, beef and dairy as well as we discussed last quarter the addition of baby back ribs to the permanent menu. As our menu continues to improve here, our theoretical costs are going up and that's in line with strategy the company has to really put more value on the plate.

Now -- and we can, I think, expect to see continued pressure at food costs for the next quarter and into 2005.

Labor came in at 32.2. That was down 60 basis points in total and it's important to understand kind of how we got this performance. We got 130 basis points of leverage at the management bonus line. Now when you parse that 130 basis points, 50 of it came from a kind of an annualized reduction of our long-term incentive plan, with 80 basis points coming from the regular bonus plan.

So you had two things moving there. We've got our long-term incentive for our general managers which we call MO plan. That was down 50, and then regular annual incentive down 80. So that was a -- certainly a very large reduction in labor and somewhat really skewed our results here this quarter.

But the bonus plan is all driven off. It's a pay for performance plan, and especially sales performance was below expectation here for the quarter.

Now, hourly labor rate was up 50 basis points and that was due to a combination of higher hourly wage rates and an increase in our dedicated to-go labor. Higher payroll taxes and worker's compensation expense rounded out for the remaining 20-basis point increase.

Management wage rates were up about 2.5 while hourly wage rates were up 3.6% and that on a trend basis broke above where we've been running.

D&O costs were down 20 basis points to 24.9 due to a lower advertising costs as a result of some of the timing of our promotions. Advertising will continue to be favorable in Q4 as we lap some initial Carside advertising from last year.

G&A came in at 9.5, that was up 20 BPs. Now this increase was primarily due to salary and benefits and costs associated with our 404 work, on Sarbanes-Oxley. I'm sure you're going to hear this quarter and probably the fourth quarter of the year, companies talk about S-O.

We estimate now that we will spend between a million-seven and $2 million full-year to comply with Section 404. That's a pretty significant number for us, and it's one that we fully intend to get a green status on 404 by the end of the year. The team has put a lot of work in on it.

Tax rate came in at 35 even, versus 36 even last year. That's in line.

Quick look at the balance sheet here. I'll talk about some of the larger fluctuations from last year's year end balance sheet.

Accounts receivable up 5.1 million, that's due to vendor receivables.

Inventories were up 13 million as due to building -- I'm going to call them building promotional proteins for upcoming campaigns.

Other intangible assets were up 5.6 million, that reflects the acquisition of the leaseholds for the former Ground Round sites we acquired.

Goodwill was up 11 million and that's the acquisition of our California market.

Now, deferred income taxes, a very substantial increase, was up 26.2 million. As we noted in the separate press release we made yesterday, this cash flow increase was a huge win for the company and if we want to go deep in Q&A we certainly can but we entered into what's called a prefiling agreement with the IRS that basically allows us to accelerate depreciation on our -- the assets, the fixed assets in our restaurants with a corresponding increase in deferral of income taxes. This did increase in a very nice increase in cash available to the company.

This prefiling agreement will also find value creation for our franchisees as we're going to be working with them to see how our franchisees can take advantage of this and increase cash flow which should be beneficial as our franchise community continues to expand rapidly.

Debt came in at nearly 26 million from year end 2003 due to stock repurchase and acquisitions. Debt-to-cap at a modest 8.8%. 81 million shares outstanding at the end of the quarter.

Now, in share repurchase, we bought back 35 million of stock at an average price of 24.87. Year-to-date that's just over $88 million we've spent. Average price is 25.17.

And at the end of the quarter, on our previous authorization, we've had 11.5 million remaining.

Now at our board strategic off-site in October, the board authorized an additional stock repurchase of $150 million, beginning in '05. We also have the approval to enter into a 10B51 plan that we will be using under this authorization and I think many of you are familiar with 10B51, that basically allows us to repurchase shares during periods when the company couldn't be in the marketplace because of our own internal blackout periods. And the 10B51 basically allows us to, based on some predetermined assumptions, purchase stock.

We will enter into that plan. We can only enter into a plan like that when we're not in possession of any material non-public information.

So before I close with EPS guidance for the remainder of the year let's talk about our recent view on commodities. We've got one data point we'd like to share today. We just have renewed our beef contract which most of you will remember expires here in November. This new contract runs until the end of 2005. Under this our beef costs will be up about 3%. That's a good number in the environment.

Now in addition, produce costs have risen materially because of the hurricanes. And we haven't yet renegotiated our chicken contract. Of course, chicken is our largest protein and that expires at the end of January. Probably more on that when we do our year-end release.

So as we think about '05 we really think we're still in an inflationary environment. We did take a point of pricing here in company markets on our menu that just rolled out to kind of help ease some of that pressure.

Now as to guidance for the remainder of the year. Unit development -- got a very busy fourth quarter here. In openings on a full-year basis we still expect 32 openings on the company side and 70 to 80 on the franchise side.

On comps we're expecting 0 to 2 for the company restaurants and 2 to 3 for the franchise restaurants.

And as I said, we have taken about a one-point increase in price in conjunction with that fall menu. Carol mentioned to you the impact of the Christmas shift.

Now I know many of you have questions about our margin guidance here in the quarter. Here's some of the headlines.

First on food costs, our final campaign of the year starts November 8 and I'm going to say it's not a food-cost friendly campaign but it does have wonderful consumer appeal. This campaign combined with, you know, our new menu, ongoing commodities inflation and short-term produce cost pressures, I think we can see maybe 70 to 90 basis points of pressure here on the food cost line in Q4.

At the labor line, we continue to see pressure in salaries, hourly wage rates, to-go labor and work comp offset by probably favorable management bonus expense here in Q4. You net them together you might see 30 to 50 basis points of pressure here at this line.

At the D&O, while we do have a favorable, you know, spending shift in advertising here in Q4, we're seeing a pretty significant increase in credit card usage and the associated fees are going up there. Clearly Q4 will also be a period where we'll be issuing more gift cards and we charge the P&L with the fees for the gift cards when we actually issue them.

We're seeing more pressure here recently in utilities and a little more bearish outlook here, especially on heating oil and other energy costs here as we go into the winter season. Our view here is to be conservative, and we'll need to let these utilities kind of play out.

Given also the lack of leverage at some of the fixed cost lines like depreciation that we have in Q4 just because we do have a seasonally lower average unit volume so we could see some there.

I think taken all together, D&O, you could see 50 to 60 basis points of pressure here.

So you kind of add that all together, that covers that explanation of how we get to a 50 to 200-basis point quarter-over-quarter reduction in margin. I'm going to say that's realistic but conservative in this environment.

Now, as to G&A, expect to be in the low- to mid-9s as we will finish our 404 work this year, and we are, as you can imagine with the very healthy pipeline the company has for new openings next year, we are training a lot of managers to support these openings so you can see management training costs bleed into our G&A as we get ready for what will be a wonderful opening season here in Q1.

No changes on the tax rate, our CapEx, and so you kind of put it all together. EPS full year we expect to be $1.30 to to $1.32. That's up 12 to 14%.

And I'll close by saying we view this guidance as realistic but conservative, given the current environment.

Now, Operator, with that, let's open it up.

Thank you. Ladies and gentlemen, if you have a question at this time please press the One 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. Once again, if you have a question at this time please press the 1 key on your touch-tone telephone. Our first question comes from John Glass of CIBC. Your question please.

(Operator instructions.) John Glass of CIBC.

Thanks. Comment on, or a question really, on your sales trends. I understand you've got some tough headwinds but maybe as you lap the rollout of the Carside business in the fourth quarter, how much do you think that is now incrementally contributing to same-store sales? And I guess could it even be a negative to sales going forward if it isn't growing as much as a percentage of sales but maybe the mix is actually coming down or dragging the mix down.

You know, John -- it's Steve. Good morning. I'm kind of losing my voice here. But I think on Carside, as we start to lap some of the big increases, I think as Dave said, we're actually, you know, looking to have Carside be more, a more of a contributor to our same-store sales in the future, the direct mail drop we're engaging in here now. The use of technology.

We are -- we don't look for Carside to lap over and become a negative. In fact, our expectation is that Carside will continue to be, you know, a very nice, you know, part of our growth ahead. Dave -- I don't know if Dave and John are going to comment on that.

Well, I think, John --this is John. We haven't leveraged the system yet so everything to this point has been locally leveraged, which is good, but the real efficiency, the real effectiveness from our perspective comes when we’ve got the system rocking and rolling from a national perspective on this, and that comes next year.

And just given -- what would be a fair assumption, in terms of national advertising? Where are you on the -- would you be able to advertise that in the first half of next year, are you that far along in the franchise roll out?

John, we're probably not on this call going to telegraph what our media plans are but I think you could hear from Dave's comment, we're going to have a substantial amount of the system converted here to Carside by the end of the year. So I think timing is key and our system will be ready, you know, I would say sooner rather than later.

Just one sort of final question is, historically you've talked about your core customer being coming up from fast-food, trading up from fast-food, and we've seen some evidence even in this environment that fast-food is closing the quality gap and driving sales.

Do you have any evidence that some of your customers have maybe gone back down to fast-food temporarily and that's one of the causes for same-store sales weakness?

I think more than that, John -- this is John. We've seen, we'll call it economizing. So there may be some contraction in the monthly visitation of casual dining, that's possible, but where we really see is in the add-on sales. And economizing, for us, is a consumer coming in and maybe purchasing fewer appetizers or drinks or desserts. And that's where we see it primarily.

You know, we're seeing some traction in October, and we're pleased with that relative to what we saw in August and September. But I don't believe given the average check difference between the categories that there are people trading down. Don't believe that.

Good, thank you.

Our next question is from Andrew Barish of Banc of America Securities. Your question please.

I thought on the advertising you started out with a weak difference but then you made it up. Was that actually in the November period? Am I just imagining that?

And then can you quantify or care to quantify the Christmas impact in terms of a percentage? I imagine the month will likely be negative. Is that accurate?

Andy, it's Carol. I'll take both of those. In terms of the advertising shift, we were short a week in August clearly. And in September we had the same number of weeks but that was after we were off-air for a three-week period. In Q4, we're short a week in October that we'll pick up in December on that side.

In terms of the Christmas, while I don't to give a precise number, but you can look at that in terms of sizing, is we're trading a Wednesday-Thursday, which typically accounts for about 25% of our business for a Friday-Saturday, which typically accounts for about 40% of our business. So that week would clearly be negative and obviously it depends on what the rest of the December trends are.

Thank you.

Our next question is from Jeff Omohundro of Wachovia Securities. Your question please.

Yes, both at the analyst meeting and today you've mentioned some excitement regarding the hand-helds as it relates to Carsides. Maybe you can put a little more color on that potential timing of roll-out and what impact you might see from it?

Hi, Jeff. This is Dave. We will be, in the next couple of weeks, we'll have about 60 of these devices in the marketplace and in mid-November we'll go to three franchisees to continue what I'll call a pretty exciting test. We do want to continue to read this probably through the end of the year in somewhat of a test mode despite the fact of all tests we've done, this is one that early-on is getting a lot of applause, as I said earlier.

We will be prepared from a standpoint of this device to be able to really gain some speed here in Q1. But I'd simply tell you that we'll come on to the Christmas holidays with somewhere in the neighborhood of 60 to 80 of these devices in place. Reading it very carefully, debugging it from a technology standpoint and being more prepared to go more strongly in Q1, Q2. To the whole system.

Hey Jeff -- it's Steve. I'll add just briefly to that that we have in place though agreements and supply to rapidly move on this. So we are -- our view here is that this is an important guest convenience feature of the brand and our servers and guests respond very favorably to it.

Thank you.

Yep.

Our next question is from Peter Oakes of Piper Jaffray, your question please.

Hi, good morning. With the fourth quarter guidance that you've shared, it looks like the comp will be the softest in about four years. And little more bigger picture, I was curious, maybe what kind of evidence can you share that the comp is not part -- the comp pressure is not partly due to cannibalization. I know this has been a question raised in the past, but you have a chance I suppose to periodically take a look back and look at the units or the markets where you have your highest concentration and get a little flavor just to, you know, share with folks that cannibalization isn't something to be a little more of a forefront of a concern. Thanks.

Yeah, hey, Peter, thanks, good morning. Yeah, on -- we're not seeing our -- we look at AUV's in our comp and noncomp base, we're not seeing any, any real divergence there. We're seeing our new stores open above expectation this year, both on the company and franchise side.

I think certainly if you get to some of the more saturated markets, you could see within a given market place, you know, competition, cannibalization, if you will, from Applebee's, but we're not seeing that on any broad front and the health of the company's pipeline and the support of our operators to really penetrate these markets is encouraging because I think, you know, where the initial first, you know, concern always comes from the operator community about cannibalization, the last thing an operator wants to do is to have a restaurant be cannibalized double digits.

So we're just not seeing that resistance in our operator community. Okay?

Thanks, Steve.

Yeah.

Our next question is from Hil Davis of SunTrust. Your question please.

Yeah, hi, good morning.

Hi.

I had two questions. One is, kind of given the success of your value promotions, especially after the holidays last year, is that something you would look to run in kind of November, December, given the consumer environment and along those lines, do you think it could make an impact or is the consumer just really kind of caught in the headlights right now.

And then secondly, kind of given the growing increasing media on national advertising, does that create even bigger swings in your sales or your same-store sales as you have unequal weightings and if so, I guess, how do you try to equal that out? Is this year odd because of the Olympics and the elections?

And then finally, if it is creating more swings, how do you look then to marketing in terms of making sure you get a return on that as well as how you keep it fresh?

Hil, good morning. This is John.

Let's take the first question, value programs. We had great success in the first quarter of this year. Really as we -- and I'm not going to comment on future activity, future plans, but I will tell you we're driven by one thing, and that's our guest. And talking to our guests and ensuring that every program we assemble and market is a superior value from their perspective. And so that's a fundamental guiding principle for us in everything that we do whether we're talking about steak or chicken or an all-you-can-eat proposition or something like that, three course combos.

So we hope that over the course of 12 months our entire marketing plan is a superior value proposition for our guests.

Now, on the advertising front, we do add a significant increase in national advertising that we've talked about for next year. We do pay attention to the advertising flow from one quarter to the next. Olympics would be a good example this year I think of where we were in that time frame, off-air for three weeks. In hindsight I don't know if we would do that again, but we are driven by the support, the targeted support that we need for the programs we put in place. And that's the primary driver. We're also cognizant of the quarterly flow and we don't let that drive us too much, though, in terms of what delivering what our guest is looking for.

Great, thank you very much.

Hill, I think the final question you had was how we think about returns.

Uh-huh.

And I think right now, we still view us in the very early stages of brand building. You know, even though we're the largest spender, we really have only been on television meaningfully for about four years, and so we continue to see television and radio as being the preferred way to reach our targeted consumer. We're a mass market name, a mainstream name, and so I think we still see good return here on our investment and next year's going to be a year with a $30 million increase in our national ad spend that we're going to even increase our reach and frequency, so we still think this is early days in brand building at Applebee's.

Thank you.

Yep.

Our next question is from Joe Buckley of Bear Stearns. Your question please.

Thank you, I have a couple questions as well. First, on the direct mail piece you're talking about doing for to-go. Will that presumably include a dollar-off coupon?

Joe, this is John. It's a great question. No. The direct mailing that we referenced -- let me clarify a couple of things.

That will take place in most, not all, of our company markets. It will take place over the next approximately 10 days, two weeks. Actually starting a little bit this weekend.

It will -- we will go out of our way in that mailing to educate the consumer. Given this is a new brand feature and a permanent brand feature and one that requires a little bit of education, we'll simplify that process for them. And we will include three components -- a mini-menu which is an imperative from a guest standpoint if they're going to take advantage of this new feature they really have to know what's available for the taking and they also need to know what phone number to call, and so that mini-menu provides all the phone numbers for that geography.

We also have two other components in there. And the -- and they are specifically addressing what guests need from us. One will be a window clingn, if you're familiar with what you get maybe when you get to change your oil at a Jiffy Lube, there's a mini-window cling with the restaurant phone number on it that you can place right in your car. That will be included in the mailing. There will be a magnet, because we know some of these calls from the car, some come from work, some come from home, the magnet can be placed on your refrigerator, it's a quick easy trigger.

Actually, we've seen a lot of people take the magnet and place the mini-menu with the magnet on the refrigerator. And Carol's suggesting we send that out to you, so why don't we go ahead and arrange to send that mailing out to you over the next week or so.

Sounds great.

Joe, just to clarify, it does not include any form of trial incentive in this mailing.

Hey, Joe. This is Dave. To just pick up on that point. It's hard for us to get -- to warm up at this point to a need to do to do any discounting or incentive. As you heard me say earlier, 22% of our dining room room guests have tried Carside and to elaborate on that, we know that about 60% of them are familiar with it.

And we've looked at the response we got in just a couple of company test markets last year when we did a direct mail piece and the response was very positive and the response was really I think a response to, "Oh, I didn't know you guys did that," so we're still in the educational mode and running pretty quickly away from any notion of discounting or couponing.

Will any of the franchisees participate in that in the fourth quarter as well?

We did roll that out. John referred earlier to a really successful meeting with our franchisees last week. We reviewed that package with them along with the cost and have made that available to them so it really will be up to their discretion. They'll probably follow our lead on this in some cases.

And there are some markets, franchise markets, who are on Carside who are participating as we speak, but not a significant number, Joe.

It's not a system-wide initiative.

Correct.

And question again for you, John. You talked about the consumer eliminating some of the side items, the appetizers, the desserts, things like that. Yet if we look at your comps, the company comps in September and October, your traffic was down, check was flat, and so I guess I'm curious about that and also curious about, how strongly you feel QSR is not winning some customers on a tradedown basis.

Let's start with QSR. Certainly you've got some blurring of these categories and I think that's probably more apparent in tough economic times, in times of uncertainty than it is in other times. So we're not naive on that point.

That may, in fact, exist. We're seeing more of this slow-down in terms of the tradeoff of certain items like desserts and beverages, maybe even alcoholic beverages and appetizers within our restaurants.

We are also, frankly, lapping some pretty big numbers from a year ago. I mean, our biggest traffic hurdle for the year is -- we're in it right now and it's really September, October, even into November a bit. And so that's our view on the world right now.

We do see a difference between what we experienced in the marketplace in August, September, and what we have experienced here in October. And we see those two time frames in a very different way in terms of the fundamentals and the traction that we're getting.

Yeah.

Joe, it's Steve. I think, you know, the September last year, we’re lapping a 5 to 5.5% traffic and that was on all-you-could-eat rib tips. It was very successful in driving big traffic. And also when we look at the comps, on a two-year and a three-year basis, especially when you look at it on a three-year basis and two years, August, September do just jump off the page as being a little bit of an anomaly for us. And October is coming right back more in line with what we're seeing on a two- and three-year basis.

Now, much too early to claim victory. We'll be reporting out our November comps here in a couple of weeks. November will be a key data point for us and then we'll round the year out. So we're, I think we're mildly optimistic about the very short-term results we're seeing here in sales. It doesn't give us enough though to put too much air in the tire on expectations though on sales.

And Joe, I think we were talking earlier as a team here. In uncertain environments like this, in tough times, the one thing we do know is it helps to be a chain concept first and foremost and absolutely you need to be the number one player in your category. So I think if you look over the past 15 months you'll see that McDonald's has performed quite well in their category and at the same time Applebee's has led its category with some record-setting performance.

So being a chain, dominant chain, and taking some growth at the expense of independents and being the number one player in the category in tough times is critical. And that's where we are.

Just curious on -- last question -- but curious on your analysis of the sales. I mean, the base run rate, X all the noise, seems lower. Is that what you're concluding, that it kind of for some reason pushed down over the last three months or would you disagree based on your analysis of the numbers?

Well, we have seen certainly in August, September if you look -- whether you looked on a one-year, two-year or three-year basis, we've seen a bit of a trough. And on a two and three-year basis you don't see that same trough in October.

And so if we look back over time and analyze all the data, this is a bit of anomaly in August and September that we attribute to all the factors we've already discussed and that's a different story on a two- to three-year basis when you look at October.

Okay. Thank you.

Thank you.

Our next question is from Robert Derrington of Morgan Keegan. Your question please.

John, if I could stay on kind of the line that Joe was on a minute ago, talking about competition within the category particularly, currently we're seeing I guess increased advertising efforts, kind of a resurgent Red Lobster. We're seeing Ruby Tuesday get into TV advertising for the first time. Chile's is introducing some new spots. Do you have any perspective on how your direct competitors are doing relative to your business and what's affecting -- whether that has any impact on sales?

Well, I think, Morgan, a natural evolution in any category or industry is to move from kind of a development-driven to an operating-driven to ultimately a marketing-driven differentiation. I think we're approaching that as a category here.

I'm sorry. Did I not call Bob Bob? I've been corrected, Bob. My apologies.

I've been called worse.

I've been called worse.

Call me what you want.

And with respect to competitive activity, it's natural that when a category leader outperforms the balance of the category that the balance of the category makes changes. And we would expect, we have a number of formidable competitors. We would expect them to come back strong in terms of their activity. And what that looks like in ‘05, we'll see.

I'm going to reiterate that we are more than 12 months out with our planning. We have complete alignment with franchisees and while we're interested in what the competitive set is doing we're much much more interested in what our consumer wants from us and so that's our focus.

You know, fair enough. Could you give us on the pricing piece, when you begin lapping. You know, what the timing of each of the components are, when you'll lose a piece? I think you took some in early ‘04, if I remember correctly.

Bob, we took 1.5% in January that we will lap in January, and we don't give any forward expectations on pricing.

Okay. Fair enough.

And then lastly, on the reduced bonuses at your restaurant level, some of your management, do you anticipate any potential problem with turnover because of reduced bonuses or particularly the reversal of the long-term piece.

Bob, this is Dave. You know, certainly if we stayed in a situation where we saw two, three, four quarters of that kind of performance, we would be concern. You know, turnover and the strong performance we've seen on retention of good people is a combination of a lot of things. Clearly their compensation is a part of that.

But this whole issue of, you know, noticeably better people, the connection we're making with the people, our communication with them and the quality, the quality of the area directors at multiunit, do a great job taking them through the rationale, do a great job explaining the lay of the land and, quite frankly, what I've seen contrary to chins in the dirt or people with their head down, what I've seen is a lot of fire in the belly in the field in the last two to three weeks as they say, we'll be back.

Now, you can ask that question again, three or four quarters from now, if we're still struggling, but that's not what we expect.

Great. Thanks, Dave.

Our next question is from Jason Whitmer of FTN Midwest Research. Your question please.

Morning.

Hey, Jason, morning.

I was wondering, with the pace that you've seen here, obviously October may be on an a trend line a little bit better, but if we continue to move in this direction, certainly first quarter doesn't get any easier on your comparisons, year-over-year.

Would there be any variable that would force you to change direction on any of your investments or on your media and pull back in any certain category or are you pretty much full force ahead for all plans on 2005.

Yeah, Jason, it's a relevant question. I think we, the management team is challenged by especially Q1 and then a part of Q2, you know, comps were lapping.

We will not take any short-term reduction just to make a quarter, if you will. We're not going to reduce our contribution on advertising, we're not going to take down our investment in our people and in our food.

Clearly we've got some big hills to climb here and I think we've had plans, adequate plans here as we think about our marketing calendar for next year. But, you know, don't expect any kind of short-term thinking on our part. This is a very, this is a management team that's in it for the long haul.

I think we've been through ups-and-downs in the category and ups-and-downs with this brand over the years. And we really believe so firmly as a management team that what we've got here, our focus on driving improvements in our menu, the focus on service and on execution, on systems and technology, combined with a great media plan, is the way to go.

And Jason, this is John, I just -- to complement that thought. We meet frequently with our franchise partners and should we desire any form of change, given market conditions, we have the ability to move pretty quickly as a system. We have those structures and those processes in place and it's important that you know that.

Very good. When you look at the market, would you place most of the shift lately into just the consumer bucket or have there been some structural changes within the category, whether it be low end, bar and grill or overall casual dining, that need adjustments and creative adjustments going forward and I think you talked at the investor meeting about differentiated service, differentiating the brand and maybe even the marketing component to that.

Is there anything that's popping up there that needs another look?

Much of what we see is external. That's a fact. But we do assess our business, by day part, by week part, by service mode, and we're confident that our plans reflect what the consumer wants from us here. But much of what we're seeing is external. As Dave referenced, the fundamentals are pretty solid within this brand right now.

And the big structural themes in the industry of increasing food consumed away from home, increasing food consumed on the go, a convenience-driven consumer, household formation, and loss of independent restaurant market share. Those things are all solid.

We are though, you know, like we've talked about as a team, we are in a mature category. A mature industry. And there is market share that's getting, that's getting battled for, and that's why as -- from a position standpoint, the importance of being number one in your category in these kind of environments is very, very important, and that's why we kind of like where we're positioned and like our prospects because of that.

Thank you very much.

Our next question is from Paul Westra of SG Cowen. Your question please.

Thanks, good afternoon. Two questions.

One is commodity costs. Your outlook, I know produce will be up here in the fourth quarter, but it looks like you're '05 beef contract at least came in better than feared. I was wondering if you could give some specifics or generalities about your '05 outlook in the other commodities area or at least if you're feeling better or worse than you were a couple weeks or a month ago.

Paul, Steve. On the commodities front, I guess speculation at this point about '05 in general is going to be a little difficult. Now beef is a very -- steaks, because we did our steak buy, that's going to be 15% or more of our overall food costs. 3% up on that is going to be consistent with last year.

I don't think we're in an environment where you're going to see total proteins up only 1 or 2%. You know, total proteins for '04 for us now, when you land it all together, all the protein price increases plus the addition of baby backs. Proteins are going to be up 4% for '04.

I don't think it's unrealistic to think in '05 you could see a continuation of that. We'll have a much clearer view of that have once we review our chicken buy, because that's, from an absolute basis, that's the biggest part of our protein cost. Chicken on the spot has trended down a little bit. People have written about that, and we're hopeful to be able to take advantage of some of those market dynamics.

When does that chicken buy come up again?

January, but we'll have a good insight into that. We should on our year-end call, you know. Mid-January.

Great. And then just one more question on this comp guidance. Your implied comp guidance I guess for November and December is for about 2%. I just want to have you reaffirm your, I guess your longer-term goals of 14 to 17% EPS, still driven by a long-term 3 to 4% goal?

Absolutely. I mean, we look at much of what is happening here as a function of not only external factors but also, as John mentioned, some of our off-air activity. You look at a two or three-year comp trend which we talked about here. They're all solid and coming back nicely so, yeah, Paul, we're not --- this management team is in no respect sitting here today thinking differently about the long term.

And then if I could just dive in one more time. This November, December period, is there anything specific you haven't mentioned where 2%, you know, given you did pretty -- almost that in October with all the noise. And anything beyond the Christmas shift in there? Or is anything like the consumer or regionality going on in the last few weeks that would make you a little more conservative than --

No I wouldn't add anything to what we've said today. We've got the benefit from now to the end of the year of 2.5 points of pricing. For a little short period here, we've got the direct mail drop on Carside To-go that Dave talked about, so I think we're maintaining in this environment, we really think it's important to be realistic and conservative and that's our outlook.

Great, thank you.

Our next question is from John Ivankoe of J.P. Morgan. Your question please.

Hi, thanks. Actually, Steve, if you could just help me understand the long-term bonus that I guess wasn't paid or was reversed to the store level managers this quarter. What is it normally as a percentage of sales? You know, assuming I guess a 3 or 4% comp, whatever your plan is. And if business stays weak, is this a current -- or is this a continued opportunity to leverage margins going forward or was this just singularly a third quarter event? Thanks.

Yeah, hey, John, it's -- on that, on the long-term incentive plan for restaurant managers, the way it worked in this particular quarter was we had a -- we basically accrue against that every quarter and we had been accruing, we had very nice performance against that long-term plan in Q1 and 2.

The way the plan worked basically the plan went from performing nicely to no payout in the plan as a result of the performance here in the third quarter.

So that's why you saw a 50-basis point decline. It was a catch-up reversal of the accrual we made in Q1 and 2. Really you kind of mark the plan to the market here at the end of the quarter.

Now, that plan is a, it's a three-year plan, four managers, it vests in three years and it pays out nicely. It can be as much as 20 to 30% of a manager's annual compensation for our top performing managers. So it's not an insignificant plan and we probably got, John, I'm going to say 30 to 40% of our managers are in that long-term incentive plan.

So -- now, what I would say is that our view would be that on our bonus plan, you know, we don't want to get 130 basis points of improvement every quarter as a result of bonus. So I think I would not view that as a more permanent long-term improvement in bonus. We're working on our bonus plan right now for 2005 so.

Yeah, so if I interpret this correctly then, 50 basis points, it would go down 50 basis points, represented the reversal from the first quarter and the second quarter and whatever was left from the third quarter of the last year.

It's actually a reversal of Q1 and 2 and then a true up, if you will, from what happened in Q3.

Okay. So even if it is zero going forward it's relatively insignificant.

Now, you know, it could -- if we come back here in Q4, and we're back then we will recognize some expense in that long-term plan.

Right, okay. Thanks.

Our next question is from David Palmer of UBS. Your question please.

Hi, guys. Two questions. I guess the first one is for John.

As Applebee's has entered the big leagues for restaurant advertisers, it seems that your traffic has become more sensitive to advertising and promotions. Have you perhaps been surprised by just how sensitive your traffic is to advertising weight or menu promotions, and if so, are you at a risk of an increasing volatility of your same-store sales that ultimately become something that could weigh on company margins?

David, no, I don't think there's risk of volatility given the way we plan, and the precision around that plan, looking at all of our metrics. But certainly we expect our investment, and next year that, you know, will be north of $150 million in terms of total ad fund national and local with $100 million of working media-plus at the national level. We expect to see a return on that investment. We expect to move consumer behavior in our favor and really what we're looking to generate here is not short-term sales gains.

But we're looking to build equity over time in our programs. We're looking to generate preference for brand Applebee's, and we're looking to secure loyalty. And that's where we believe the sustained growth will come from. And that's our mission. This team here is fixated on long-term sustained growth, frankly, at the expense of competition.

And just a second question, I guess this is for Steve. Just accepting the guidance for fourth quarter, your 2004 company restaurant margin should finish the year down 40 basis points or more to just under 16%, yet -- and if, again, accepting the projection for fourth quarter, you'll finish the year with something like a 3.5% comp for the year. Thinking ahead to '05, if your pricing is up 2%- plus next year, what level of traffic growth should we be thinking about would be needed to maintain company restaurant margins at or around 16%?

Yeah. I think it's a -- to kind of forecast into '05, and there's a lot of assumptions there, especially on pricing, I think, you know, when you, certainly when you've got zero to 2% comps you're not going to get hardly any leverage on margins, in fact, you're going to have a deterioration of margin. I think, traffic we've been -- you know, our goal is to have traffic out-pace pricing, on, if you look at our long-term outlook. So I think, you know, you've got to kind of make your own, your own assumptions here on the traffic for next year.

Certainly we get, we've been getting nice capture rate or flow-through on traffic. You get better margin leverage --I'm sorry, from pricing. You get better margin leverage from pricing than you do from traffic increases.

So we'll comment later on, on our year-end call, kind of about how we think about margin next year and some of those dynamics.

Okay. Thanks.

Our next question is from Sue Perram of Avondale Partners. Your question, please.

Good morning. Two questions.

Can you go back to the to-go mailing and describe what's on the mini-menu? Are you focusing in on particular items? Are you focusing at all on appetizers or desserts, kind of those add-ons that generally get left off when people do the to-go service.

And also, can you explain to me the divergence that I'm seeing between same-store sales performance between the company and the franchise? The last four or five quarters, it looks like company has out-performed franchise, and it's reversed last quarter and now this quarter. Should we expect that trend to continue?

Sue, this is John. The menu that I referenced in the Carside direct mailing is the full menu. It's just downsized to fit into an appropriately sized envelope, but it has the entire menu on it. But most important, it has the entire market's list of restaurants and phone numbers for the consumer to utilize.

Sue, this is Dave. To your second question regarding the difference between company and franchise comps. The current trend you see, and there's really, we've talked about any of these initiatives, we typically take the lead as we did with Carside and KDS and we've got a large number of franchise markets today that are hitting the ground for the first time with both of these initiatives and we've talked about what both of these do to drive comps.

The key point here, Sue, is if you look, when you look at longer-term trends you look at a two-year trend, it's pretty much even. We see these fluctuations up and down as we roll initiatives and they catch up, but when you take a longer-term view, we tend to follow one another very, very closely.

And I'm just going to say. Let's take three more questions and if we can just for time, let's kind of do one question per, if that's possible. Operator, let's take the next one.

Our next question is from Glenn Guard of Legg Mason. Your question.

Hi, quick question on to-go actually just a follow-up. You said 22% of your customers have tried to-go. How many of that 22% have done it again? Do you have any data for us in terms of did they like it? Are they coming back? Are they doing it frequently? Is there a frequency number you could give us or -- any kind of color on that would be very helpful.

Glenn, without getting into -- this is John. Without into specifics, there's a very, very high level of satisfaction. I think Dave alluded to that earlier. The key for us is to close the gap between awareness and trial. But when they try, they walk away or, more importantly, drive away, happy. But we do have upside on the awareness front, and we do have upside on the trial front. But we like what we see.

So that's about as specific as you want to get in terms of -- I'm just trying to get a little more color as to how many are coming back and doing it again.

Yeah, I think in this forum that's all probably all the most specific we want to get.

Glenn, this is Dave. The only other thing I'd share with you is as we watch CSI and Carside, we talk about overall sat-measure (ph), which we've done in both dining room and Carside. When you drill underneath that, in Carside, the best way for me to respond to your question is to say one of the strongest areas of performance we see from that guest measure is their intent to revisit.

I'm not going to quantify that for you. I'm not sure we could do that here today. But of all the measures they respond to in Carside, the one they respond to very positively is, do you intend to come back.

Great, thanks a lot.

Let's take two more questions operator.

Our next question is from Dennis Forst of Key McDonald. Your question.

Yeah, just a follow-up on that same statistic, the 22% of dine-in. What percentage of the Carside is made up by those dine-in customers? Do you have a feel for that?

Actually, there is a discrete occasion here with Carside and so there is not a lot that we're seeing in terms of the existing dine-in base. We do know a Carside user is a heavy user. That's a piece of --

No, I guess maybe the inverse is, what percentage of your Carside business are customers that never use dine-in, have not been to an Applebee's dine-in. Do you have a feel for that?

Yeah, Dennis, we don't have that data here at the call. And so I don't want to misrepresent it.

Okay. And Steve, you had said that the -- you'll give an update on the year-end call in the middle of January. Isn't the call typically the second week of February?

Yeah, Dennis, I probably in my diminished capacity this morning, I probably misspoke. Our normal year-end earnings call is the second week of February.

Okay. Great. Do you have a date for that yet?

I think Carol does.

I believe it's February the ninth.

Okay. And we'll get the December comps and January comps at that time?

Not necessarily.

What does that mean?

I think you have to look at our trends over the past couple years, of when we release December and January comps.

Okay great.

Thanks, Dennis.

Thank you.

Our final question is from Joe Buckley of Bear Stearns. Your question please.

Hi, just a question on the hourly wage rate increase you shared with us. The 3.6. That sounds a lot higher than what you’ve been running and a lot higher than what we've been hearing. I wonder if there's any nuances in that that we should be aware of.

Joe, it's Steve. It is. It's up about a point where we've been running. We've got, I think it's a function of a couple of things. We've got -- we're doing a wonderful job of retaining our best, you know, back of the house cooks and clearly in this environment where we're stressing execution, we're highly incented to keep our most capable, you know, line employees, back of the house employees, on the team. We think that's a reasonable price to pay.

We also on our to-go servers, we're seeing some, you know, continued improvement in the wages that our to-go servers are earning, to drive up, (ph) 15-second greets at the Carside, so that's a relatively new against trend and I want to see how it comes in here in Q4, Joe, before I would kind of project that we'd go much beyond the next quarter or two. But I do believe, especially for our back of the house, line cook labor, I don't see that necessarily decreasing any time soon.

Okay. Thank you.

And in closing, I'd like to note that Lou Kaucic was one of four human resource leaders named to Human Resource Magazine's 2004 honor roll. He was in the company of General Electric and SBC. It's a big honor.

Additionally our HR team was recognized yesterday in Dallas at the People Report conference as the recipient of the 2004 Heart of the Workplace Award winner. I think these are relevant awards because they're indicative of a culture that is people-centric, and generally over time that leads to noticeably better results.

We thank you for joining us.

Thanks.

Thank you.

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