Dine Brands Global Inc (DIN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Applebee's international first quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to introduce your host for today's conference, Ms. Carol DiRaimo. Ms. DiRaimo, You may begin.

Good morning, and thank you for joining us today. As a note, this call is being broadcast simultaneously over the Internet.

A couple of calendar items to note.: Comparable sales for our may fiscal period, which ends on May 22nd, will be released the week of May 23rd. And our second quarter 2005 earnings are scheduled to be released on Wednesday, July 27th, after the market closes. And our quarterly conference call will be on Thursday morning, July 28th at 10 A.M. central time. June and July comparable sales resulted will be included in the second quarter earnings release.

Many of the statements we're about to make with respect to our business outlook including comparable sales increases, costs, earnings per share growth and new restaurant development are forward-looking and based on current expectations. There are several risks and uncertainties that can 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 minimum wage and other employment laws, food costs and inflation. You should review our form 8-K filed with the SEC on February 9th 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 President and Chief Operating Officer, Steve Lumpkin, our Chief Financial Officer, and John Cywinsky, our Chief Marketing Officer. And with that, I will turn it over to Lloyd.

Thank you, Carol. Good morning. I'd like to share a couple of thoughts with you from a thousand feet as we start our call this morning.

First, we're obviously happy with Q1 results having really exceeded our own expectations. April results, though, as you know, showed some softness, which may be an indication that consumers are changing behavior. But quite frankly, it's just really too early for us to know that.

In any event, 2005 is a year in which we are committed to further improvement and the operational initiatives we introduced last year. And that includes Carside and Weight Watchers in particular. And regardless of the direction of our economy, our continuing innovation, particularly around our menu and technology, and our strong culture, well, I think they position us really well for the future. And speaking of innovation, I am really proud to tell you that Kurt Hankins, our Senior Vice President of Menu Development and Innovation, will be recognized by Menu Masters at the upcoming NRA convention for just that -- for innovation.

So with that I'll turn it over to Dave Goebel.

Thank you, Lloyd. And good morning, everyone. I'd like to first address what is probably top of mind for all of you, and that's recent sales trends. We're generally pleased with the system sales of 2% for March, 3.7 in Q1, and 1.9% for April, rolling over the 8-2 of Q1 last year and the 6-5 of April 04. Now there is clearly a little more momentum on the franchise side of the business, and I'm going to address that in just a minute.

On the company side, we've seen a change in guest behavior in resulting sales trends. That's evidenced by our flat to negative check averages since the middle of March. Let's take a second and drill a little deeper on that. In company restaurants, March comps were negative 1.8, and check was flat. In week two of that five-week period, we launched Barbecue Fever, which really took us to a flat check effectively eliminating pricing of 1% in our numbers at that time.

And now the combined effect of the negative Easter and some New England weather, offset by the positive effect of President's Day hit an overall detrimental result of about 1.5. So where did that leave us? It left us with an adjusted March comp pretty much near flat against 9.2 of last year. And again, our most difficult one in two-year comparisons of the year. Carside To Go momentum continued, but was less of a driver in Q1 for company restaurants, despite average weekly sales approaching $4,900. And related and as planned, we shifted local media out of Q1 as last year was fairly heavy carside spend. In fact, on the company side, Q1 will be our lightest quarter this year of local media spend.

So our March conclusion was that it pretty much met our expectation, given all these factors. Now let's look at April. April comps in company restaurants were down nine-tenths of a point and negative check accounted for most of this. We believe Barbecue Fever is still part of the issue. And as you know, the Easter shift benefited the numbers by 1 point. So after this adjustment, April traffic was really a little softer than March, but against easier comparisons.

So we study guest behavior. And there are a couple of things that come to the surface as we do that. First of all, we see early week softness, with lunch weaker than dinner. Secondly, there is a shift to lower-priced entrees, and a higher incidence of salads and sandwiches. And third, we see the biggest check declines in the middle of the country. Michigan, Minnesota, Texas, Kansas City, and St. Louis in that order. And although it's too early to determine whether or not these $2 to $2.50 gas prices are affecting consumers psychologically, we definitely saw a correlation when prices began to climb above the $2 barrier at the pump.

Is the consumer looking to economize? Possibly. But as Lloyd said, it's simply too early to get a good read on that. Now I should probably spend a moment addressing the gap between company and franchise comps this year. A gap that's been in about the 4% range.

There are four factors contributing to most of that gap. First, the menu and promotion pricing is higher in aggregate than the company portfolio. Secondly, the franchise restaurants have seen a greater lift from national Carside To Go advertising. Most of you will recall we use local media and company markets last year, yet more than half of all the markets had no media until this year. And of course, those were our franchise markets. Third, franchise restaurants are still in the adoption franchise of KDS, and they're benefiting from the implementation spike, the same one we saw around efficiency at peak periods. And finally, the regional distribution of franchise restaurants has not had the same weather-related impact on company sales as company markets because franchise concentration in New England is relatively minor.

So overall regarding sales, where are we? Well, as Lloyd said, we're pleased with Q1 results, particularly given the '04 hurdles. And quite frankly, a little disappointed with April. But we remain intent on maintaining this value proposition in this environment with continued aggressive food innovation. Including our spring menu, that rolled out nationwide earlier this week. With that menu, we'll take an approximate 1.5% increase. As you know, we've significantly lagged our competitors on this front. In this price increase is not across the board, all the way across our menu. In most regions, in fact, it affects change on five or six entrees, and in some cases moderate adjustments to appetizer and dessert pricing.

Let's shift to development. On a development front, it's full steam ahead. As we stated in our release, we now expect 135 openings in 2005, and our pipeline is as strong as it's ever been. We're dialing up company openings to at least 50 this year, and anticipate at least 85 on the franchise side, resulting from this continued confidence our franchisees are showing in the brand as well as attractive financing alternatives.

And this increased number of Company openings reflects the reopening of eight restaurants in Memphis this year. We've reopened three of these in March and April with very strong results in the first couple of weeks. We expect that this is going to be a tremendous market for Applebee's, and we're making a significant investment in our facilities, our training, as well as our overhead costs to gear this market back up for good solid long-term success.

To the Carside front, our mix in Company restaurants reached 10.0 in Q1 versus 9.4 for the same period a year ago. And as you have seen, our franchisees have gotten a real push with the launch of national advertising in mid-February. I also note that three of our 12 company regions are now over $6,000 a week average sale. In the entire portfolio continues to trend upwards.

As the roll-outs of the Carside wireless hand-held device continues, we're now in nearly 200 company and over 125 franchise locations. We are very pleased with the results. They continue to take critical minutes out of the payment process. And a reminder, this was an area identified in our research not only as a key driver of loyalty on Carside, but also intent to revisit Carside. We're going to continue roll-out of this program, giving high priority to our high volume Carside locations.

We continue to believe there is still a lot of opportunity here. The guest continues to demand convenience. And since the beginning of our initial roll-out, we have spoken about this as a multiphased initiative. And I don't think there is any question we're executing better with each phase, but we're not finished yet.

Just a few brief comments on KDS. I spoke about the results our franchisees are seeing in the early adoption phase. But in addition, we're not nearly finished on the company market front either. Best practices, newly designed reporting tools, KDS implementation in high volume Carside locations for Carside, and recently, testing KDS in the bar will all lead to greater efficiency and convenience that the guest continues to expect from Applebee's.

On the operations front, we're pleased with progress we continue to make on CSI, our customer satisfaction index both in the dining room and in carside. We're pleased with the continued good news on our brand tracker measures, and very solid performance on turnover and retention throughout the management and our associate ranks.

Finally. You've heard us talk on previous calls about this flawless execution. What an outstanding team of operators we have. Led by Carin Stutz as our Executive Vice President of Operations, Miguel Fernandez leading company operations, and Sam Rothschild with an outstanding field organization heading our franchise operations. And the best news is our bench strength is deep, and it's very impressive.

We just had an outstanding GM conference several weeks ago that left our field organization focussed and very, very clear about our goals. We're pleased with the progress we're making, but we're still a long way from being satisfied. We know we can continue to improve execution around food and service. Our teams are focussed, and our teams are also ever mindful that competition in today's casual dining environment seems ever present, and undoubtedly it will get tougher. But once again, we do not intend to give an inch on our leadership position.

Our goal is to continue to broaden the gap. And although we're mindful about recent trends, you will not see any knee-jerk reactions from this management team. There is a strong pipeline of innovation around both food and revenue initiatives. We've committed that to our associates and our shareholders. And we know you have learned to count on that from us as well. So with that, I'll turn it over to John.

Thanks, Dave. Well said. Good morning, everyone.

There are three subjects I'd like to address this morning. First is an overview of our marketing activity for the quarter. Second, I'd like to highlight our new spring menu, which as Dave referenced, was just introduced. And I'll wrap up with a perspective on our future business, including a few comments on the up-front media landscape as we see it today.

So let's start with the marketing plan. We drove results through April with a multi-tiered plan consisting of about five very distinct initiatives. If you recall, we started the year with a superior value proposition in three-course combos. We simultaneously complimented three-course with the seasonally appropriate Weight Watchers message through about mid-feb. We then introduced our first flight of national advertising behind Carside to Go. And in March we transitioned to a primary focus on Barbecue Fever, and a secondary focus showcasing our neighborhood position in the NCAA basketball tournament.

Now this combined activity resulted in an unprecedented Applebee's media presence throughout the first quarter. We then closed out the final two weeks of April with a stand-alone flight of Carside television. And as will be the case throughout the year, each of these initiatives plays a very specific and strategic role in helping to differentiate our brand and break through the clutter in this very competitive marketplace. We believe this is a highly effective model for maximum relevance and sustained growth over time.

Now, as I mentioned earlier, we have just rolled out our spring menu in all 1700 restaurants. In keeping with our emphasis on innovation we have introduced approximately 10 to 15 new or improved menu items, depending on the restaurant. Some of these are core menu items, and others are optional items, meaning the restaurants can select which ones make the most sense in their respective geographies.

And we'll we're certainly excited about all 15 items, we're most excited about this abundant new lineup of Applebee's Bowls, including the Crispy Orange Chicken Bowl, the Grilled Steak Teriyaki Bowl and the Chicken Broccoli Pasta Alfredo Bowl, (that's a mouthful!) among others. In fact, the next time you're visiting one of our restaurants, we would really encourage you to try one these new bowls. They're just -- they're simply outstanding, and quite possibly the best value on the menu. We're also providing a much anticipated beef addition to the Weight Watchers menu in the form of new Teriyaki Steak and Shrimp Skewers, An incredible taste for only 7 points for those of you who are counting.

Other new items include the indulgent Cheesy Bacon Tavern Chips, the wonderfully unique Thai Chicken Pizza, another product you really need to try, the bold Jalapeno-Jack Chicken Sandwich and our new Black and Blue Burger and our Bourbon Street profile, the new Bourbon Street Chicken Salad, just to name a few. The bottom line, we're proud of this new lineup, as well as the already overflowing pipeline that we have in place for the fall menu and beyond.

So as we look to the future, we remain confident, particularly as Dave mentioned, given the fact that we have successfully navigated the first four months of the year and the approximate 8% year-ago sales hurdle they represent. We have essentially run that gauntlet. Now, we move into May with a new menu, some new pricing, and a tasty new sirloin steak toppers campaign that begins on -air next week. This program tested extremely well with guests, and will be introduced with the new TV spot featuring parody lyrics to a popular Johnny Paycheck anthem, or anti-anthem from 1977.

Now if you know the song, take this job and shove it, this may strike you as an odd choice of music for an Applebee's commercial. Take this leap of faith with us. From our perspective find it a really entertaining, fun, engaging way to communicate "take this steak and top it." Anyway, you'll see what I mean when Carol forwards that spot to you, I believe in a few moments here. It's pretty darn effective. And you'll also notice that the 30-second version includes a 5-second tag at the end reinforcing carside to go. It's great work.

Finally, we just concluded a two-day meeting with our franchise marketing counsel where we agreed on our menu, marketing and media plan for 2006. This puts us in a position to begin national media negotiations with importantly maximum precision and efficiency. Our media agency of record is Starcom MediaVest Group. And their early read on the up-front market suggests less overall demand and more reasonable pricing than maybe we've seen over the past few years. Incidentally, Starcom has once again been honored as Media Agency of the Year by Advertising Age, marking the third time in the past five years they have received this award. They're just a terrific agency.

We'll certainly keep you posted on the up-front market dynamics the next time we speak in late July. In closing, our guests can expect to receive a steady diet of Applebee's news, value, and innovation as we move to the balance of this year. And with that I'm going to turn it over to Steve.

Great, thanks, John. And thanks to all again for your continued interest in the company.

Let's take a look at the numbers here. And then I'll round it out by giving an outlook here for Q2 and then full-year. Now as to the first quarter here, company sales up 11% to nearly $271 million. And that was driven by the comps, as Dave talked about of positive 0.3, and a capacity increase of 11.5%.

We opened 37 Company restaurants in the last 12 months. And that's a real nice organic unit growth rate of about 9.5% and the acceleration of the pace. And we've been talking about that acceleration for the last couple of quarters. Our view here is that accelerated development continues certainly this year and will in the next year.

Adding to that capacity were the ten California restaurants we acquired last April. Now franchise royalties and fees up 7. 5% to 33 million, driven by the strong franchise comps -- nearly 5. And 79 openings during the last 12 months. Now that 79 openings, that's normalized capacity growth of about 6. 5%, and that does exclude the impact of the franchise acquisition/disposition activity we've had.

Other franchise income came in at 1.1 million. This decline is related to a decrease in the insurance captive income due to fewer franchisees participating, and due to decisions we've made to reduce the types of insurance products we offer. Management is evaluating our need to be in the insurance business given the stability of the markets here recently. Now the other difference there between other franchise income versus expense of about 250,000, relates to revenue from technology products and services we provide to our franchisees.

So total revenue broke 300 million, 304.5 million. That's up nearly 10% for the quarter. System-wide sales during the court up 9.5 driven by comps of 3.7 and unit growth of over 7% with 116 new restaurants opening the last 12 months. Net income record $31.7 million versus 29.7 last quarter. That's up 6.5%. Diluted EPS came in $0.38 versus $0.35 last year for a growth rate of nearly 9%.

Let's hit a couple of things on the PNL. The press release talked about our margin. We're pleased what happened at margin. Margin came in at 16.2. While that was down 70-basis points from last quarter, we did get good flow-through given the difficult sales comparisons we were up against. Food costs came in at 26.5, up 40 basis points from the prior year. We continue to see the increases there due to a higher commodity cost, and of course the addition of baby back ribs last year which increased our theoretical food costs, partially offset by about 1% pricing that we carry here into the quarter. We now anticipate that proteins will be up about a point and a half for the year, with back ribs probably seeing the most cost pressure in the protein complex.

Now labor, labor was overall 32.8. That's up 10 basis points. The hourly labor saw a 35 bit increase, and that was behind 2.4% increase in hourly wages. We did get some help at the management labor line as bonuses were lower than last year. Now that help was about 55 basis points. We really were rolling over the huge bonuses that the field earned based on the strength of last year's first quarter. So no real concern there. But we did get 55 basis points of help in lower management labor.

Management wage rates were up 2.6% during the quarter, and that pressured margins by about 20 basis points. Higher payroll taxes came in for the remaining 10. Now in D&O, D&O was up approximately 20 basis points to 24.5. And due to rising utility and credit card fees, rent depreciation. As we talked about, we did get about 50 basis points of leverage because of favorable timing on advertising as we lapped the local Carside launch last year. We're going to expect to see that timing difference will come back into play primarily in Q2 and Q3 this year.

G&A came in at 8.8%, a leverage of 30 bps, that was really due to, I think, absorption over a bigger revenue base as well as the timing of our general manager's conference, which was held in the second quarter this year versus Q1 of last year. Now that's about a $1 million shift that you're going to see into the second quarter. And when you hear me talk about Q2 guidance, you want to remember that. Preopen expense increased from 2/10 in '04 to 4/10 in '05, due to 13 openings this quarter versus 8 last year. Tax rate 34.6 versus 34.9, really in line with guidance.

Not too much happening on the balance sheet, just a couple of quick things. Inventories down 7.5 million. As we try to do a little bit better working capital management surrounding back ribs and riblets. Debt was down 8 million versus year end, Debt-to-cap was here at 5%.

Shares out. We had 81.1 million shares outstanding at the end of the quarter. Share repurchase, we bought back $18.7 million of stock at an average price of $25.62. And at the end of the quarter, we had about 131 million left under our authorization.

A couple of quick points here on guidance. Dave did talk about our unit development goals where we're talking about more than 135 new restaurants. And that's at least 50 on the company side and 85 on the franchise side. The company is going to be split 50-50 first half, back half. So about 25 openings here in the first half, and franchisees are expected to open 25 to 30 in the first half with the balance in the back half.

They did talk about Memphis. That's really the major new news and why we're increasing our guidance. The eight stores, there was certainly uncertainty as to whether we were going to get those eight stores closed up. We now have closed all those deals and feel very clear that we're going to get the eight stores open in Memphis. And that's going to end up being a nice transaction for the company. We did finalize the purchase of those stores just this week, and the final couple of stores.

The implications of this accelerated plan include higher management training, higher pre-opening training costs, and higher pre-openings, in addition we do have a strong pipeline for '06. And that will continue to impact our costs this year. As a system-wide sales, we're expecting an increase of at least 3% and expected to accelerate on the back half of the year. Margins now, restaurant margin similar as we've been talking about. We tweaked G&A a little bit here to be -- we say approximately 9%, and I think that tweaking is really, as we think about looking at some higher management training costs we've got with the big pipeline and company openings, and some timing here on the GM conference, as we'll incur that cost, or already have incurred the cost here in the second quarter.

No changes to the tax rate. Capex now 140 to 150 million. That does include Memphis, the eight openings there. In addition, two weeks ago we announced the acquisition of 12 restaurants in the Ozarks. These 12 restaurants sit geographically between our Kansas City and St. Louis markets. We'll get nice synergy there. 39.5 million cash consideration for the deal. We expect this deal will close some time here in Q2.

Now when you think about the Memphis openings, and you think about this new acquisition, we're really kind of washing those two together. It's going to be a wash to EPS. We've got a big investment in Memphis in G&A. We really wanted to put a substantial infrastructure in place in Memphis to really get the market ready for opening some high volume stores. So don't expect much accretion or dilution when you put those two deals together this year.

So based on that, we now expect $1.49 to $1.52 with the range of $.36 to $0.38 in Q2 given the factors we talked about today. So that's the end of my prepared remarks. Operator, let's do turn it over for Q&A now.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is from John Glass at CIBC World Markets. Your question, sir?

Thanks. Good morning. Higher national ad spending was one of the key catalysts coming into this year. And I guess given the softness recently, particularly in comps.

How do you think about that ad spending? Do you in hindsight being perfect, would you have spent less or in a different way? And I guess from the data you're seeing, is your performance recently better than the peer group, or is it in line? Thanks.

John, this is John Cywinsky. It's a good question. We're very pleased with our shift from local to national from '04 to '05. That's just smart business. It allows us to be more efficient. We're a bit front-loaded in the quarter.

Actually, as you look at the four-month time frame, we really loaded up in Jan-Feb, and kind of the early part of March. So I'm not surprised by the results. We've got some external factors in April that we're trying to understand. But the bottom line in response to your question, John, we're very pleased with that move.

And John, I think it's important to remember, we are not spending more on advertising in total. It was just a shift to national. So it's more of an efficiency thing.

Now with regard to the peer group, we don't have peer group data out here yet in April. So I think, you know, you could look to some other names here in the space that have been talking about, some similar things we're seeing here in April, principally Outback, Chang's, others especially in the midwest markets.

I personally got a very early nation thesis on perhaps some things happening in the automotive industry, in the supplier base as well as all the blue collar folks. Those are our folks. A little too early to make a call on that. But certainly there is stress in that community on jobs, as well as stress at the pump. We'll have to see.

Okay, thank you.

The next question is from Janice Meyer of CS First Boston. Your question?

On the marketing side, please, just as a follow-up. Is there any quantitative measures to support your thesis that the increased national media made good business sense?

And secondly, if I look at your 2006 marketing plan, how would that differ from the 2005? I think this year you sort of characterized it in the past as mining some of the initiatives you rolled out in '03 and even '04. How would you characterize '06 broadly?

Great questions, Janice. I'll answer one directly and avoid the other. Let's talk about national media. Really two answers. Over time, we have become a media-driven company in some respects in the way we market. And the quantitative evidence there that we would point to is our past three-year results. We're pleased in some respects that that is category-leading and record-setting from our perspective.

The more recent shift of a half point to local to national, $20 to $23 million is smart, because it allows us to be much more efficient nationally. And we can quantify as an example a $20 million allocation across 210 markets as opposed to a $20 million allocation nationally. Where just it provides tremendous efficiency. We just started that in January. I think you'll see the net result in terms of performance over time. There is a lot of quantifiable data there, Janice, that supports that strategic move.

On the other point, 2006, I'm reluctant to go there other than to say the lead time provides us tremendous benefit. We continue to maintain tremendous flexibility. We have a very clear strategic plan and a high level of confidence as we move forward.

Yes. I think just one quick addition to that. If the up-front really flows the way our view is, we probably get not only let's call it a 10% lift in our total spend because of the growth of the system, we probably get some effective spending power just because of the rate of inflation difference.

We think that's a positive move for next year's plan. And I don't think you're going to see us differing materially from multiple messaging. We think we're in the early phases of multiple messaging across the broad features of our plan.

So promotional activity, Carside to Go, Weight Watchers, brand imagery, those are the kind of things that I think we are very committed. We think that's what is going to differentiate us and our brand building in the future is to stay that course. So I just want to give you that reassurance.

The final point there, Janice, an important one, there are so many variables in the market from a marketing standpoint, certainly. The content we market, the advertising for communication purposes, the media variable, the way we operate in restaurant, the external factors, the competitive landscape, it is very difficult at the end of the day to quantify -- to isolate one of those variables and draw a correlation.

Thanks.

Thank you.

Our next question comes from Joe Buckley of Bear Stearns. Your question, sir?

Thank you. A couple of questions if I could. First, just on the option footnote in the 10-Q. You look like your pro forma dilution was only $0.01, versus $0.03 last year. I'm curious what drove that. And if you think your option dilution is about $0.04 annually now.

Hey, Joe, it's Steve. Good morning. We made a little change in our option plan this year, Joe, is that we used to grant all options at one time for the full year in January.

What we're now doing is we're actually making four separate grants throughout the year. Same number of shares. We're just doing it over a four-quarter period.

So, Joe, that number would tend to increase.

It would increase as the quarters go.

On an annualized basis will be the dilution be changed? Or stretch the impact until you lap this change?

The other change we made, Joe, is we changed the term of the options from a 10-year term to a 7-year term. So that may actually reduce a little bit of the impact. We haven't quantified that for a full year yet.

Okay. Just a question on the 1.5% pricing increase that you took in the spring menu. I guess in some ways just curious what sort of -- how you thought about that, particularly given the softness in the past few weeks, or maybe this pricing decision was made well before that. And are you concerned that if the consumer is looking to trade down, that the timing of the price increase might be ill-advised?

Joe, maybe a couple of perspectives around the table. We have been working on this price increase for a while. I think as many of you know, we take a very disciplined approach and actually do in-market testing at different pricing bands before we actually take it. So we think this is -- we do have a lot of pricing power here. And we think it's important to take it when you can.

I don't think we necessarily change our mind just given the real short-term view of the consumer, some of the stuff the consumer has been doing. And as John talked about, the Bowls on our new menu, which are a very prominent feature of the menu are a huge value. So we think you can still do a price increase by continuing to deliver a lot of value on your menu.

Joe, this is John. I think Steve captured it. We get credit for being a value leader. And from our perspective, value is much more than just price alone. It's about the entire experience. We make a lot of progress. there.

The discipline that Steve referenced would lead us to about -- about a nine-month lead time from actual strategy implementation on a test market basis to reading that data, identifying where our guests give us permission to take price, and then implementing. So it's part of a long-term approach. Our rate of success is very, very high in terms of capture. And none of this in this menu is a reaction to any short-term trend.

Thank you.

Thanks, Joe.

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

Actually, I have a couple if I may. In the press release, you do talk about the April sales performance, and explain some of the average check. If you wouldn't mind, can you remind us how average check/traffic combination behaved when sales did slow down last summer?

Carol, we're going to pull that up.

Okay.

Go ahead.

The next one, actually, as Lloyd mentioned up-front talking about Kurt Hankins and the success you had with the menu initiatives and the quality of the product, and now actually being recognized externally, I'm curious from John's perspective, do you think the consumer's given you full credit for the food quality improvements that you've made? And does this at all influence how you think about marketing going forward?

Peter, it's a great question. I think, again, from a macro standpoint, we would point to our results. And suggest that a number of variables have contributed, not the least of which is menu improvement.

We have internal measures to suggest we're getting credit. As to whether we're getting full credit, Peter, I think that takes time. I think consumers, guests notice this over time. And that's a period of years, not months. But the results that we've generated would suggest that we are getting a degree of credit here. That may not directly answer your question, but that's the best I can do.

And Peter, on the trends we saw kind of last summer, if you remember the category kind of slowed basically in May. We did not really slow until August. We had a lot of new initiatives then with Weight Watchers and Baby Backs that hid it. When we saw in basically the Aug -- I'm sorry -- the July time frame check trended negative versus our pricing in October it was actually flat.

I think we're seeing a little more happening on the check right now than we did see of all of last year though. Just to recap, it is midwest. And even excluding the Texas market, 47% of our company restaurants are in that midwest market, Kansas, St. Louis, Michigan, Minnesota. That's where we're really seeing the softness.

Peter, this is Dave. The other thing that is probably noteworthy in this arena, when we talk about current activity, one of the things I think our deep-dive showed us last year, around this gas price issue, when there is a lot of noise in the marketplace and a lot of volatility and a lot of uncertainty, our guests tend to -- at least it appears tend to pull back a little bit more.

Let me try to explain that. At $1.90 with a lot of noise on the newspaper and on the news, and in the marketplace, our guests looked like they pulled back a little bit. However, if that $1.90 stabilizes at $2.10 and the market becomes quiet and the consumer begins to accept the new level, it appears that guest check returns.

That's why we say it's a little too early to get a read here. A lot of it is going to depend on the consumer's reaction to this current environment. If we say -- if this flurry of activity we've seen over the last 60, 90 days in the marketplace begins to dissipate, the guests may react as they did before. Just calm down a little bit, quite frankly.

Dave, I'm curious, are you guys at all surprised that this little bit of tightening of the belt that you seem to be seeing, particularly in the midwest is showing up more on check and not necessarily on traffic at this stage?

I think a little bit. I think we -- it's an interesting relationship for us to have traffic growth ahead of check growth. Yeah, I think we're a little bit -- I think what it reflects is our consumer is a much more mainstream consumer there is no doubt about that, especially when you compare it to other brands in the space.

And we do have a midwest concentration. So I think there is something going on there. And I won't talk about my auto industry thesis because it's really not baked. But there is something going on there that we're going do get underneath. But it's a little bit surprising to us.

Yes, I think, Peter, one of the thoughts with what we have placed in the market here around all the new food and innovation as well as the multiple layering of our message, the guest seems really to be drawn here.

The little bit of traffic change we have seen, as I said earlier, looks like it's occurring slightly around lunch, a little bit early week. But the preference for Applebee's as a casual dining alternative looks like it's holding strong.

Okay. And just one last, if I may. Do you folks have any new views as far as the incrementality of Carside?

Peter, the Carside initiative continues to be highly incremental. It's a distinct occasion from our perspective. All of our data and evidence supports that. And we're confident it will continue to be a growth engine for us.

Okay, thanks a lot.

Thanks, Peter.

Our next question comes from Andy Barish of Banc of America Securities. Your question, sir?

A question on the steak promotion coming up. I guess if you guys had the crystal ball back six months or so ago, would you still be rolling out what I imagine is a higher-priced promotion here given the external factors that you've so eloquently described?

Andy, this is John. We think this is an effective way to stimulate traffic. And our overall value proposition is pretty, pretty solid.

When you look at the pricing that we've got here and that kind of 10 to 11 to $12 range, what you get for what you pay is a pretty -- pretty good value. So no second thoughts here whatsoever. We will, as always, monitor the environment and the economy, and we're flexible if we need to adjust accordingly.

Our people love steak.

I think, Andy, both in tests and early week read here, reaction to some of these items like the Grilled Portobello Sirloin, the Shrimp and Parmesan Sirloin, the plate and the value is really an attention getter. So I think value is the key here. So would we think differently about the promotion? I'd offer that we wouldn't.

Are you going to let -- is the consumer going to know about kind of the bowls, some of the value-oriented items with some POP or table tents on this new roll-out?

The menu features those items pretty prominently. They're hard to miss when you get in there. And we're very comfortable with the way we're merchandising those.

And I should, tremendous enthusiasm on the part of the franchisees with this menu roll-out, particularly those items.

I've watched another thing in restaurants that is interesting. I might take us back a couple of years, the first time that somebody walked out of the kitchen with a sizzling skillet, and you saw heads turn, saying wow, what is that. As you walk through the dining room with these bowls, they're an attention-getter.

It is certainly a different presentation, the size of the bowl there is a lot of conversation in the dining room about what the heck is this. So at the present time, though, most of the -- most of the familiarity with the bowls and exposure to that is going to come in restaurants.

And why wasn't that promoted on this -- on this current flight?

Well, the decisions we make take into account a lot of variables. This is a new product. And we want our restaurants to have some great experience with this. And steak has been a very successful program for us. So there are a lot of factors that go into what we do when we do it. And that's probably all I'm going the say on that point.

Thanks.

Thanks, Andy.

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

Hil, we can't hear you.

Can you hear me now?

There you are.

Sorry about that. Technology. One, I guess, is around the consumer and the second around marketing a little bit. Around the consumer, if you go back and look at the summer of 2002, that was kind of when the consumer got the weakest. And you saw them move from managing a check, maybe trading out of soft drinks and waters at lunch and out of alcohol at night into soft drinks, maybe to reducing a little bit of frequency. And it just seemed to be an issue of the macro factor.

And any fears over that happening, or any early reads on that? And then secondly, in terms of -- I understand what you're saying about not necessarily it's a price point, it's a value you drive in terms of the dining experience and the food. How can, with the steak promotion, what are the other things you can do just around the excitement of the promotion to drive a overall higher value with that promotion, given that it will be a higher price point, but you can still create some consumer arbitrage there?

Hil, this is John. Two good questions. The economizing. I think what we saw back in '02, and what we're seeing here is not necessarily a pullback on visitation, but it is, to your point it's a cutback. I still want to go out. I still want to indulge. I will economize by maybe pulling back on the beverage or the alcohol I'm going to drink or the dessert or the appetizer. There may be a little bit of that going on in the marketplace right now. And we'll need a little more time to understand that.

With respect to how you deliver superior value, on the front end you can send messaging to drive trial. On the back end, which frankly we think may be even more important, is when they're walking out that door that we've delivered a superior experience. And they're walking out saying I'm coming back. That is what I received from Applebee's for what I paid was a superior value. They don't necessarily think that way. But our objective is to send those folks out knowing they're coming back. And a lot of it has to do with our people and our service.

So would you put any -- maybe given that and you can do some of that as well, would you put any POP material around the store that might take them to the bowls, or something at a lower price point so the consumer felt that they could trade once they wanted to if they got inside. So you use steak as a leader and then come in with something else on a price point, or is that too confusing to the guest?

Our hallmark may be historically is value and choice. And that menu we have provides every category of choice, every price point. And so if you're looking to economize, you can do so with that menu. Our merchandising is effective. And we're pretty confident, hil, that we have addressed every consumer segment, including a segment with a household under $50,000.

Great. Thank you all for your time.

Thanks, Hil.

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

Hi, thank you. Have you gotten a chance to talk to your franchisees to see, even though they're trending at a better same-store sales growth rate, if they're experiencing similar menu trade-down, and even some of these weak park patterns that you were talking about.

We certainly, as John indicated earlier, David, we had nine or ten of our significant franchises here that participate in our franchise menu and marketing council the last two days. And certainly had a number of opportunities to talk with them about the health of their business there is a very nice glow about that group today in terms of their performance, not only the back half of last year, but through the first four periods of this year.

We really do not have from them any indication that suggests there's is a trade-down at this point, at least -- we don't have the same visibility to the makeup of sales that we do on the company side. We did kind of tee up with them and will be continuing to talk with them about that over the next 60-90 days.

Some of that is being masked on initiatives on where to go on KDS.

And Weight Watchers. Maybe you can just talk about that big picture, if that is giving you a new demographic users and maybe the lift that that gave you in April, if that's still giving you a pretty good lift there.

David, Weight Watchers is a terrific win for this brand. It's hard to quantify the halo benefit of that relationship. We continue to represent that range that we spoke to last time on the call, 5 to 8%. There is some seasonality there. But the contemporary message it sends around Applebee's is very important. The female skew is very important.

The fact that some of these guests might be slightly better educated, and a little more affluent, when we're on-air marketing that, we see great success. And that's a long-term proposition from our standpoint. So we like everything we see about it. The things we can quantify and those things we can't quantify.

And one last one -- in the advertising weight in April, was that greater or less than last year? And I understand you had a greater kind of TRPs is the term you use, greater weight of advertising in the first quarter. How did kind of the year-over-year change in advertising weight shift as we got into April? Thanks.

David, this is Carol. The April increase was the lowest increase of the year in terms of TRPs. So in terms of first quarter was higher than the April period.

Okay, thank you.

Less pure promotional weeks because of carside to go.

David, it's good to know that you know that acronym, TRPs, it's impressive.

Our next question from Bob Derrington of Morgan Keegan. Your question, please?

Yes, hi. Thank you. John, could you help us understand, Applebee's has traditionally used major media as its advertising method of getting the word out to its consumers. When you look at all the changes that are going on in that media today, things like TiVo, the use of satellite radio, is it tougher to communicate with your guests? How do you alter your media buy in order to continue to connect with those guests?

You know, the media landscape is changing. Significantly. And it's fragmenting. It used to be 20 years ago that there were three big networks and one independent station. Now you've got more than 100 channels out there. Cable has just surpassed network television in terms of share. You have nontraditional mediums, not the least of which is the Internet.

And then you've got people who have some opportunity to bypass commercial advertising. But that's for the most part not our guest. So we still find broad-based mediums to be very effective to reach our guest. And we're investing in nontraditional mediums as well. There is a balance between the two. And it's not a -- these changes don't happen overnight.

I think if we go out a decade from now, the media landscape will look radically different. And we're confident we've got the best media agency in the business to help us navigate.

Okay. And one question if I may for Dave. When you look at the development for the company, for the system this year versus last, and also going into '06, clearly there is a pretty substantial I guess what you could call a land grab going on.

How do you -- how do you look at the returns when you build the system out to the extent that you are, and as your peers are also, it seems to be stepping up their development pace, is there a time or a rate or a point at which you say, you know, maybe we're going too aggressive? How do you look upon it?

Yes. Bob, Dave and I will both answer this. I think just because you said the word "returns." And that always pricks my ears up. We have not in any respect -- we're not expecting a less return in this environment.

There is no question that when you look at how we're developing, the company because we've made recent acquisitions, we've actually got some territories where we're not that penetrated. Southern California, which we picked up this year, Washington, D.C., the Houston market, the Memphis market. So we've got -- we've got a nice play here where we don't have to feel like we have to do deals that maybe will get a lesser return.

And then there are markets like Minnesota and Kansas City where you we continue to develop where we're already deeply penetrated. So we try to look at it as a portfolio and get a return out of the portfolio versus site by site.

Yes, Bob, I would say that there is no question if you were a participant in our conversations whether they're around our site review meetings or our planning process for '05, '06, and as we look to dial-up development, the discipline that we maintain around our attitude about return on investment capital has not changed. I think the key is what Steve said.

We manage the entire portfolio, recognizing that we're trying to balance this important element of market penetration and leadership position with that discipline around ROIC

Fair enough, thank you.

Thanks, Bob.

Our next question is from Jeff Omohundro of Wachovia. Your question, sir?

Yes, thanks. Just wondering if you could update us a bit about issues you might be pursuing regarding customer relationship management, how you might be leveraging your technology base there?

Jeff, won't go there. But we'll assure you that we've got call it a large incubator with all sorts of initiatives being developed. And some of those may appear this year, they may appear in the future. But we won't speak specifically to our brand development initiatives.

Jeff, it's Steve. I'm going to agree with John. The CRM, I think is a management team, we really embrace that CRM needs to be an important part of our future. And it is untapped, unleveraged, like a lot of things, though, for us, it's a question of managing the right set of initiatives. And we've been really focussed on driving menu innovation, service innovation, technology.

We didn't talk about it in this call, but we're rolling a new point of sales system into the field. We've got a new labor system that will be coming out of tests this summer. So we've got some other technology initiatives, the hand-held, that are ahead of CRM. But CRM is going to be more and more important for our future, no doubt about that.

Great, thanks.

You bet.

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

Good morning. The tasty steak toppers, what does it lap against last year.

The baby back rib launch that we did last year.

And in terms of Weight Watchers, you're releasing a new item. Is there a schedule for new products to be introduced to that line? Do you anticipate having a certain number of products every quarter to that? How are you viewing that?

Sue, that's a terrific question. Weight Watchers is part of our core menu. And so we evolve our core menu a couple of times a year It's important we innovate. It's important we strike the right balance between maintaining the favorites that our guests love, and providing them new news. So Weight Watchers, absolutely will change up appropriately over time.

Thank you.

Operator will take one more question. I know people need to get to another call.

Our final question comes from Mike Smith of Oppenheimer. Your question, sir.

Actually it's sort of an industry question. Since you could be a proxy for maybe the blue collar diner. But with Weight Watchers being new, year-over-year, having been introduced last may, if it's creating that much of your sales, could it be your customer base is feeling more of an economic pinch than let's say your major competitors?

Mike, it's Dave. I'll kind of echo some earlier comments that it is -- given this current environment, I would say it is way too early for us to try to make a conclusion, or to draw any definitive statements around that, whether or not the consumers moved In that direction yet.

Thanks.

You bet. Thanks, Mike.

I think that's it. Thank you for joining us today. And we will speak to you in July.

Bye-bye.

Thank you.

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