Dine Brands Global Inc (DIN) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the IHOP fourth quarter and fiscal year 2005 conference call.

My name is [Jackie], and I will be your moderator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Miss Stacy Roughan.

You may go ahead.

Good morning, and thank you for participating on IHOP's fourth quarter and fiscal 2005 conference call.

Today with us from management are Julia Stewart, President and CEO, and Tom Conforti, CFO.

Before I turn the call over to Tom and Julia, let me remind you of our Safe Harbor regarding forward-looking information. Today, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause the actual results to be materially different than those expressed or implied in such statements. We caution you to evaluate such forward-looking information in the context of these factors, which are detailed in today's news release as well as in our most recent form 10-Q filing with the Securities and Exchange Commission. In addition, IHOP disclaims any intent or obligation to update these forward-looking statements.

Now, I'd like to turn the call over to Julia Stewart.

Thanks, Stacy.

Today, Tom and I would like to present our prepared remarks in a slightly different format than on prior calls. We will forgo the reiteration of financial results included in the news release. Instead, we'd like to keep our comments to a few financial highlights, as well as provide some additional detail and metrics not contained in the news release. By doing so, we hope to make our formal remarks more useful and move forward to the question-and-answer session quickly.

So with that, let's turn to EPS.

We had a strong fourth quarter in fiscal year 2005 performance, which reflected our clear and successful financial formula. This formula relies on system-wide sales growth and new franchise restaurant openings, coupled with expense management and share repurchases. Our 2005 results clearly illustrate the power of this financial formula.

Our EPS results for the year, $2.24 including charges, and $2.27 excluding impairment and closure charges and sale of real estate gain, were the result of pro-active G-&-A management and continued share repurchases throughout 2005.

As you may recall, we took steps to reduce G-&-A spending in the first half of 2005, when same-store sales growth slowed and we continued to benefit from this emphasis on cost control and sales re-accelerated in the second half of last year. We expect same-store sales growth momentum to continue in 2006, and plan to resume some level of expense growth levels around the 5% range, excluding estimated stock option and other stock compensation expense.

We also pursued opportunistic share repurchases in 2005, which provided an excellent vehicle for value creation. We repurchased approximately 451,000 shares in the fourth quarter, 2005, and approximately 1.8 million shares throughout last year at a total expenditure of $77.5 million.

In 2005, we also met our performance expectations with regard to the two key revenue drivers of our business -- same-store sales growth and new franchise restaurant openings. Despite modest growth in the first half of 2005, strong promotions and other catalysts in the second half of the year delivered a 2.9% increase in same-store sales for all of 2005, essentially, at the midpoint of the 2% to 4% annual growth target, we established at the outset of last year.

Our strategic focus on energizing the brand supported this growth. Limited-time offers in the third and fourth quarters leveraged IHOP's core equities and delivered positive traffic results. We utilized four national flights of cable advertising in 2005, that delivered a unique and compelling limited-time offer message to consumers and improved awareness of the IHOP brand through our come-hungry, leave-happy campaign.

Our limited-time promotional strategy continued in 2006, kicking off the year with All-You-Can-Eat pancakes. On Monday, we launched our second promotion of 2006, Cinn-A-Stacks. Cinn-A-Stacks are your choice of either pancakes or French toast, that are prepared with a spread of cinnamon roll filling and topped with a decadent cream cheese icing. Cinn-A-Stacks is a highly unique, appealing item that consumers were only able to get at IHOP.

We took unprecedented steps to revitalize our system-wide menu with comprehensive menu updates in May, 2005, and subsequently, in November, 2005. Over time, we are working to gradually reduce the number of items on IHOP's menu for improved operational efficiencies at franchise restaurants, while at the same time, providing enhanced breakfast items and exciting new lunch and dinner offerings.

Our focus on price moderation throughout 2005 also contributed to sales and traffic growth during the second half of last year as franchisees kept price increases moderate during both menu cycles. Franchisees took approximately 2.5% and 1.8% price increases in the May and November periods respectively.

Initial guest response to the introduction of gift cards during the fourth quarter, 2005, has also been positive with a solid level of redemption occurring since the Christmas-holiday period. We have plans to further grow the level of gift card sales and redemptions throughout this year.

Now, as I mentioned on our last call, next Tuesday, February 28, is National Pancake Day. IHOP and our franchisees are supporting this celebration by offering guests a free short stack of pancakes at IHOP restaurants system-wide. In turn, we will ask guests to consider making a donation to a terrific charity, First Book, for the amount they would have paid for the short stack of pancakes.

First Book is a national nonprofit organization that gives new books to children in need. Starting today, we will promote this offer on national television for the next week, leading up to National Pancake Day.

Turning now to new restaurant openings -- our strategic efforts around maximizing franchise development contributed significantly to our system in 2005. Franchisees developed and opened a total of 58 new IHOP restaurants during 2005, 24 of which opened in the fourth quarter. Our area licensee in Florida opened five additional IHOP restaurants during the year. In addition, we developed four new IHOP restaurants in our company market of Cincinnati last year.

This totaled 67 new IHOPs added to the system, which met our franchisee, area licensee, and company development expectations for 2005. 11 franchise and company-operated IHOPs closed during 2005, which brings the net number of restaurant additions to the system to a total of 56 IHOPs last year.

In 2006, franchisees and our area licensee are expected to open new IHOP restaurants in 33 states, including the return of the IHOP brand to the State of Kentucky. This is a milestone for us as IHOP has not had a presence in the State of Kentucky for more than 20 years.

Our development pipeline continues to be robust with franchise development agreements covering 419 franchise restaurants signed, optioned, or pending. Approximately 25% of these deals are with franchisees new to the IHOP system.

This year, our franchise and development department will continue to focus on securing multi-store development agreements for target markets, including the State of Vermont. With the signing of a development deal in Vermont, IHOP will have a presence in all 50 states in short order, which will be another exciting milestone for our brand.

Internationally, we expect to pursue additional development opportunities in Mexico and Canada over and above these currently signed or pending agreements.

Franchisees completed 210 restaurant remodels as of the end of January, 2006, which brings the total number of IHOPs remodel with our current design package to 275 restaurants system-wide, or approximately 22% of the system. We expect franchisees to complete approximately 150 additional restaurant remodels this calendar year, and by the beginning of 2010, all restaurants in the IHOP system are expected to be remodeled.

In addition, we plan to roll out IHOP's new restaurant building prototype to the system by the end of this month. We expect to see a number of these new prototypes in markets across the country by the end of the year.

The new prototype, which was tested in Cincinnati, will provide guests with a new look and feel, inside and out. It was developed to capitalize on IHOP's key brand equity components, based on extensive consumer research, as well as to leverage our strengths as a lasting American icon.

The prototype uniquely expresses our brand through the use of IHOPs iconic A-frame sloped roof at the entrance of the restaurant. We have incorporated the color blue prominently, along with other warm and inviting colors, textures, and lighting, as well as an interior graphics package that together, ties images of IHOP's past with the present.

Importantly, we believe that by mirroring the restaurant remodel package in many ways, the prototype will present an environment that is more conducive to lunch and dinner dining and is supportive of IHOPs long-term vision for the future. As you can imagine, our franchisees are eager to start building the new prototype.

Turning to an important sales metric, day-part mix remained relatively constant at the end of 2005, versus 2004. For the system, breakfast traffic was 36%, lunch was 31%, carryover was 6%, dinner was 12%, late-night was 5%, and graveyard was 10%.

In our company market in Cincinnati, traffic patterns continue to be somewhat different -- breakfast traffic was 25%; lunch was 28%; carryover was 8%; dinner was 17%; late-night was 4%; and graveyard was 18%. We attribute the more evenly balanced sales distribution in Cincinnati to the fact that all restaurants opened as 24-hour locations and offer an appealing array at breakfast, lunch, and dinner.

Turning to 24-hour operations, 681 IHOP restaurants, or 56% of the system, operated some form of 24-hour schedule at the end of 2005. We will continue efforts to extend operating hours at additional franchise restaurants this year, which would generate a small level of incremental sales if successful. Additionally, we also expect a number of restaurants scheduled to open this year to utilize 24-hour operation.

Our strategic focus on improving operations performance produced solid results in 2005. At the end of the year, 87% of all franchisees were rated an "A" or a "B", while the remaining 13% were rated as a "C" operator. We had almost no "D" or "F" left. This improvement reflects our success last year of impacting and influencing "C" operators to improve as we move our operational standards higher at the same time.

Our Mystery Shop program is a critical vehicle, through which we are able to monitor the guest experience, as well as provide feedback to franchisees about their performance from the guest perspective. Franchisees installed approximately 225 Micros point-of-sales systems in 2005, which brings the total of pollable POS systems to 912, or 75% of the system, and by the end of 2007, all IHOP restaurants must utilize a pollable POS system.

Now, I'd like to turn the call over to Tom Conforti, our Chief Financial Officer, to provide you with a more detailed discussion of our segment performance and cash flow generation, among other items, for the fourth quarter in fiscal 2005.

Thanks, Julia.

As Julia mentioned, I'll focus my comments on information about our financial performance that is not contained in today's news release. This will include a discussion of our segment performance drivers, cash flow highlights, as well as a high level review of unit economics at franchised restaurants.

Before turning to these details, I first wanted to suggest a more apples-to-apples comparison of 2005's EPS performance versus 2004. While the release provided pro forma comparisons, excluding impairment closure charges and a gain from the sale of real estate recorded in fiscal 2004, I thought it would also be beneficial to compare our earnings performance without the effect of the fifty-third week in fiscal 2004, which added approximately $4 million pre-tax, to 2004's results. So, excluding the effect of the fifty-third week, impairment and closure charges and the real estate gain in fiscal 2004, 2005's net income would have increased 16.4%, to $44.5 million, and by $0.43 per share, or 23.4%, in net income per diluted share to $2.27.

Moving to segment performance -- let's start with franchise operations.

Revenue grew 2.7% in the fourth quarter and 6.2% in fiscal 2005, driven by higher retail sales as a result of the growth in the number of effective units, as well as the growth in same-store sales. Our revenue performance during these periods also compares favorably to 2004, even with the impact of the fifty-third week, which included, in this segment, an additional $1.5 million in revenue associated with an extra week of royalty and driving sales.

On the expense side, franchise operations expense decreased 6.3% in the quarter, primarily due to a managed reduction in the Company's advertising fund contributions, as well as lower microsubsidies IHOP paid the franchisees.

Expense growth through the year was modest at 1.8%, growing at a lower level as a result of these savings throughout 2005. Franchise operations profit was $88.6 million through the year, which was in line with our 2005 performance expectations for this segment, and grew 10.5% versus 2004.

Turning to rental operations, profit in this segment decreased by 24.3% in the fourth quarter, 2005, and by 8.6% for the year due to our modest, same-store sales performance in the first half of 2005, and the effect of favorable lease terms offered to franchisees on refranchised restaurants. Also, of course, the comparisons are impacted by the fifty-third week in 2004, which included approximately $2 million in pre-tax benefit associated with an extra week of rental income without an expense.

We refranchised eight restaurants during the quarter and a total of 26 restaurants in fiscal 2005. We continued to benefit from our old model rental relationships, earning a rent margin at 776 IHOP locations as of the end of 2005.

Rental operations profit was $33.2 million for the year, which met our 2005 performance expectations for this segment. The performance of our Company operations continue to improve in both the fourth quarter as well as for the full year, 2005. Sales decreased in this segment by 49.9% for the quarter, and by 55.8% for the year, driven by our successful refranchising and repositioning efforts as we placed weaker-performing restaurants in the hands of franchisees with deal structures that mitigated their downside. As a result, we ended the year with only 7 company-operated restaurants, six of which were in our company market of Cincinnati.

Company operations expense declined by 56.5% for the year, primarily as a result of our repositioning efforts. It is important to understand that in almost every instance, we have been able to refranchise restaurant takebacks in 2005, from defaulting franchisees immediately, foregoing significant expense associated with taking possession of and operating the restaurant.

Company operations loss narrowed to $1.1 million for the year, which met our 2005 performance expectations for this segment, decreasing our loss by 63.9% versus 2004.

Finally, turning to financing operations, this segment continued to gradually decline as expected, in line with declining long-term note balances in the fourth quarter of fiscal 2005.

Segment comparisons, 2004, are also impacted by the fifty-third week. In 2004, this added an extra week of interest income, which amounts to approximately $450,000 pre-tax.

Financing operations profit was 14.7 million for the year, which met our 2005 performance expectations for this segment.

Moving to general-and-administrative expense, G-&-A came in 1.8% below 2004 spending levels at $58.8 million. This was not only due to the careful expense management that Julia referenced earlier, but also due to the absence of certain one-time expenses in 2005 that we incurred in 2004.

In 2004, we incurred increasing recruiting and relocation expense associated, in large part, with the development of our dedicated market in Cincinnati, as well as increase professional services expenses incurred due to the implementation of Sarbanes Oxley. Additionally, reduced travel and conference expense was a significant factor driving G-&-A expense lower in 2005 than in 2004. This was a result of the proactive steps we took earlier in 2005.

Now looking ahead, we will continue to aggressively seek out areas to manage and control with spending, but we will resume some spending growth in 2006, as our sales results have shown great recovery in the second half of 2005.

A particular strength of our operating model is our ability to generate significant reliable cash flows. In 2005, we generated $74.8 million in total cash. Now, this includes 55.4 million in cash flow operations, as well as 19.4 million in cash generated from the run-off of principal receipts from note, equipment contracts, and direct-financing leases receivable.

Looking at free cash flow, that's cash from operations less CapEx, per share was approximately $2.45, while cash generated from the run-off of our principal receipts of long-term receivbles was nearly $1 a share. Cash from operations in 2005 was lower than the prior year, partially due to a one-time cash charge -- noncash charge -- of $14.1 million in 2004, associated with our company restaurant repositioning efforts. Cash from operations was also impacted by higher advertising payments in 2005 compared to 2004, as well as the decrease in net tax liabilities associated with the tax treatment of our receivables run-off in 2005.

Before moving on, I'd like to take a moment to provide an update on our IRS appeals process. As you know, the IRS is challenging our tax treatment of the accounting methodology IHOP uses to report initial franchise fees for Federal income tax purposes. While our appeal is still under way, we have continued to pay taxes over time associated with past deferred tax obligations. As a result, while we still expect our worst-case federal tax obligation to be approximately $19 million, excluding interest penalties and any related state tax liability, should the appeal not go our way, we are now anticipating that IHOP's net federal tax obligations to be approximately $10 million. Therefore, we would expect to receive a refund for taxes already paid, which translates to significantly less cash outflow as a result of any potential negative outcome of the appeals process.

CapEx came in well below our expectations at $7.4 million for fiscal 2005, primarily due to timing of restaurant development in our company market of Cincinnati. We expect to catch up in spending in 2006. It's reflected in our CapEx guidance of $12 to $14 million in 2006.

Moving to balance sheet highlights, cash and cash equivalents decreased, primarily due to cash generated net of CapEx being offset by share repurchase activities and dividend payments during the year. Long-term asset categories continued their gradual decline as expected due to our business model change.

I also want to mention that we are in the process of actively evaluating the alternatives and implications of addressing the covenant restriction involving minimum shareholders equity levels on our private-placement debt. We hope to determine a more definitive fact by the end of the first half of 2006, and clearing to share that decision in a timely fashion.

Finally, I'd like to provide you with a snapshot of the long-promise unit-level economics at franchise restaurants. Now, please, bear in mind that this information is based on summary, unaudited financial statements that is we have collected from our franchisees and whose accuracy we absolutely cannot vouch for.

This information includes 785 restaurants that operate under old model economics, which typically have higher costs of doing business than restaurants developed by franchisees. These higher costs include higher rents and a higher cost of capital, but substantially lower up-front investment as IHOP delivered turnkey operations to franchisees through the use of our balance sheet.

The old franchising model, represented for our franchisees, a low-investment, limited-return profit model, as IHOP needed additional revenue streams from franchisees to justify the use of our own balance sheet.

With that caveat, an average old-model franchise restaurant reported an approximately 8% profit margin from the operations of the four-wall restaurant in 2005. Average retail sales at a franchise restaurant were approximately $1.7 million in 2005, while food costs were approximately 25.1%, and labor costs were approximately 32.5%.

Now, we also look at the profitability profile of franchisees with restaurants not developed under the old model, that is, restaurants where the development and financing came from sources other than IHOP. Now, profit at these 223 franchisee-developed restaurants was reported at approximately 11% for the four-wall profit margin, and average retail sales were approximately 1.7 million again in 2005. Food costs were approximately 24.6%, and labor costs were approximately 33.2% at franchisee-developed IHOPs.

With that, I'd like to return the call back to Julia.

Thanks, Tom.

We are extremely pleased with our performance in 2005. 2005 was always the year in which we said we would reach steady-state and complete our business model transition and a year in which we would demonstrate the full strategic and financial benefits of our new business model, and we did just that.

We ended the year with strong same-store sales momentum, which we expect to continue into 2006. Our franchisees met their development commitments in the number and time frames expected. Careful G&A management demonstrated the type of operating leverage we can achieve even when faced with modest sales performance in the first half of 2005, and we kept our commitment to maximize shareholder value through share repurchase and dividend payments.

Since 2003, we have returned in excess of $215 million to shareholders. IHOPs three-fold strategy, energizing the brand, improving operations, and maximizing franchise development, are as relevant today as they were three years ago, and we will continue to employ these strategies with a disciplined approach in our efforts to become number one in family dining.

With that, Tom and I would be pleased to answer any questions you might have.

Operator?

[OPERATOR INSTRUCTIONS]

And your first question comes from Michael Gallo from CL King.

You may go ahead.

Hi. Good morning.

Good morning.

First question I have is just as you look at the improved operation performance over the last few years, you've now got almost 90% of the system is "A" and "B" operators. I was wondering what the next step is? Is it raising that bar for what classifies "A" and "B"? I mean -- clearly, it seems like the operations are certainly getting to where you ultimately want them to be.

Well, I appreciate the compliment. We can always raise the bar.

The real focus for us in '06, will be in the service platform area. We think and know and believe we have some opportunities in the service area to even make it a better defined program for us at IHOP. So, that's really our focus, and our franchisees are very supportive of that. They recognize we have an opportunity in that area, but I think we'll always be raising the bar.

Yes.

And then, just, any update on your -- I know you were looking at possible to-go types of initiatives?

We've actually begun testing that program, and we'll do more of that testing this year in '06. Whether or not we're ready for system-wide rollout remains to be seen, but we've begun the work and the process of testing, not only items, but the packaging and the marketing of it, the operational execution of it -- too soon to tell.

And then, just a final question -- I know the company operations have swung around in terms of the profit and loss in the second and third quarters. There was actually a slight net profit, which burst again in the fourth quarter. What are your expectations for that going forward? Should we continue to see it bounce around to the extent that it has, as you make some of the investments or testings at the company units, or is there anything in the fourth quarter that was somewhat of an anomaly and should be closer to break-even going forward?

Thank you.

Two things -- one, you'll always see some of those anomalies as you open a new unit and there are expenses attributed to the opening of a new unit -- getting it up and running, additional labor costs.

But I think our expectations in Cincinnati -- and I think we've said this before publicly -- have been to break even, or slightly better, in terms of our overall belief. That's really a testing ground for us, and as such, if we get to break even or slightly better, we'll be thrilled, but the real advantage of Cincinnati is to provide breakthrough testing and research. What we've been able to get out of Cincinnati the last couple of years has been tremendous for us.

Mike, there are two components to that segment. One is what we do in Cincinnati, which Julia captured perfectly. The other is the stores that is we might take back from time to time.

Our franchise and development team and our ops team gets huge credit this year because we had a bunch of takebacks this year that we never literally took back, but instead, when we saw the restaurant was going to be -- was going to be relinquished by the existing franchisee, our franchise development teams and our ops teams identified someone who would take it directly. We, in a sense, were a broker.

So, we were able in 2005 to keep off practically any charge related to takebacks because our teams did such a good job at transitioning a restaurant from one franchisee to another, and we hope to do the same going forward.

OKay. Great.

Thanks a lot.

And your next question comes from [Ethel Hill] from [Morgan Joseph].

You may proceed.

Hi. Great quarter.

Thank you.

On your to-go menu, are you also thinking in terms of drive-through or curbside?

We're going to walk before we run. I'd love to see us do additional work in to-go, and that may be the case. There are certainly some interest in it. I don't know if I'd see those as national programs, given suburbia and the design elements of our buildings, but certainly there are people who would love to see us test that in the future, and we certainly will. But system-wide -- don't know if I see that as a system-wide vision.

But applicable in some cases?

Absolutely.

And you've got franchisees wanting and desiring to test that, so, we'll get through that first avenue of to-go, and then, take it from there.

What's your biggest stumbling block there?

I think --

Packaging?

For to-go, or for some of the other ideas?

For to-go.

To-go is literally getting the operational standards in place, getting the marketing pieces in place, and getting all of the franchisees to understand the intricacies of what happens on a Saturday and Sunday, when you're on an hour and a half wait. It gets a little complicated in terms of how we're going to make that work.

So, we've been very focused on going slow and methodically, and then frankly, what aspects of the menu travel. Right? The truth of the matter is, we have a very large menu. What makes sense to put on a to-go menu, and as you know, pancakes don't have a 15, 20-minute hold time in terms of being warm.

So, it's trying to determine what are the right things for the menu.

Okay.

And as far as the IRS is concerned, are you implying that there would be only 9 million cashout flow? Is that what you were saying?

No. What I said was our obligation is 19, but because, in the last couple of years, we've been paying taxes that were owed previously, associated with that deferred tax obligation, the net would be $10 million.

The net would be 10.

Yes.

Okay.

And the gift cards -- are you telling us how much there were in the fourth quarter of last year and the run-off since?

I don't think we've actually said that.

We did about -- we really introduced it system-wide, and I think everybody went live by the end of November -- middle of November -- and during the middle of November to the end of December, we got about 2.5 million in sales, and we project that we'll do a lot better this year through some of the programs and again, getting it in the system.

But we're, as I said, we're pleased with the initial results, and that shows me there's an interest from the guest in getting that gift card and carrying it around in their wallet, and now, we'll do more to promote it this year.

Okay, great.

Thank you.

Thank you.

And your next question comes from Bryan Elliott from Raymond James.

You may proceed.

Thank you. Good morning.

A couple of clarifications -- excuse me -- on the pricing, you mentioned two different franchisee price measurements, 2.5 early in the year and 1.8. Should we add those? Were we on a, basically, a 4-ish, 4.5-ish, franchisee price year-over -- through '05?

Yes. To the best of our knowledge, that was the price increase. That's an average of what we saw, but I think that's a fair averaging for you to do.

Okay, all right.

And the unit economics stuff that you gave us -- maybe I ought to drill down offline -- but the labor cost, would that include like a full management team and or is that just hourly labor?

No. That labor cost includes what we call craft, or hourly, the back of the house, which is cooks, and a management complement.

Okay. Alright.

And curious how those costs might compare to some of your mature stores in Cincinnati?

We don't have mature stores in Cincinnati.

Fair enough. Okay.

And I guess, may I ask the question the other way -- if you look at the more balanced business that you're getting in Cincinnati at maturity, would it be a reasonable to expect that your prime costs would be lower than what you gave us were franchisee prime costs?

I think from a food-cost perspective, you can probably make that delineation. From a management perspective and labor perspective, I wouldn't go so far as to say that, given the fact that our volumes are high, and we're 24-hours, and we pay presumably larger benefits, and we're doing a lot of testing there, so, it's really hard to say at this point.

You've got a lot of cost in there from just a sheer testing perspective, and remember, we're running an incredible -- and I think I mentioned this at Analyst Day -- we're running an incredible third-shift, which does require a full management complement, and that's not the case in a lot of the IHOPs across the system.

So, I still say, Brian, that's probably comparing apples-to-oranges.

Okay. That's very helpful.

And last question to clarify, Tom, on the IRS situation. So, if I heard you right, what you're saying is is that given the draw-down in the deferred tax accounts, that the most adverse outcome would require a one-time cash outlay of 10 million, which is down from the almost 20 million that was the worst-case outcome articulated previously?

That's correct, Brian.

Now, worst-case excludes, in this definition, interest, penalties, and any state tax liabilities. So, just on the federal side, the worst case -- if the IRS decide no interest, no penalties, would be $10 million.

Okay.

And do you have corporate California tax exposure since their government is almost as big as the one in Washington now?

Is that a political question, my friend?

Would the tax potential state tax liability you've just referenced be of some magnitude given that you're in the people's republic of California?

We would have -- we would, should the situation arise, be writing the check to Arnold Schwarzenegger, but outside of that, there's nothing. There is a state tax liability, so we would have it.

Okay.

Thank you.

Thank you.

And your next question comes from Mike Smith from Oppenheimer.

You may proceed.

Good morning, Mike.

Well, good morning.

Just a couple questions -- one for Tom -- Tom, during '05, how many of the old model deals did you do with the franchise -- the refranchising of the restaurants?

You know, every deal, if I recall correctly, Mike, every deal that we refranchised was refranchised the old model way. So, what was the number? I think we gave 26 in our comments? I think there were 26 takeback situations, but ask me the second question as I thumb through the presentation.

Well, trying to, I'm trying to ascertain how many of those old initial franchise fees clicked in to your -- I guess it would be your--?

Financing operations.

Financing operations.

Yes. Every scenario where we had takebacks, we did it the old model way.

So, does that mean that there were about 6 million of those franchise fees in there?

I would say not. So, the profit margin that we get on these old model deals, because, in many cases, we have -- it's 26, yes -- because we have a carrying value on our books for notes. So we have a restaurant that we franchise X number of years ago, it still has a balance on that note receivable, and so, when we remarket it to a third party, a franchisee, we may or may not make a margin on that.

Okay.

I wouldn't assume a simple calculation like that. We can't disclose what that component is.

Okay.

You mentioned you're trying to renegotiate the covenants in your notes for the equity you must maintain or the ratio you must maintain?

That's for the minimum shareholders' equity that we have to maintain.

Right.

I presume that's going to -- right now, you probably don't have a lot of repurchase authority left?

No, we have enough to -- we have enough repurchase authority left. I think we have 500,000 shares left on the repurchase direction from the Board.

So, we have some movement immediately, and on top of that, the covenant, the gap between the minimum shareholders equity and where we are now, allows us to continue to buy stock as we've disclosed previously. We're not going to be impeded in the near term by that covenant restriction.

Okay.

It's going to have more to do with availability of cash. If our share repurchase levels are a little less than earlier years, it will be more likely because we've limited cash. Then these covenant restrictions get in our way.

Okay.

On the -- economics that you gave us, the 8% four-wall margin, is that a cash flow number, or is that a pre-tax number, or what exactly is that?

[Inaudible] is a cash flow number.

Okay.

And what typical investment in an old model and a new model is now what?

Think about the old model for a second -- let me ask you you, how do you want the question answered? Do you want to ask what the franchisee investment was or what the total investment was because--?

I think in the old model, the franchisee investment, and in a new model, I'd like to know what the total investment is.

In the old model, the franchisee investment was just cash in. That enabled us to finance the restaurant for him.

So what we said, remember, is the average franchisee was 250,000. We would finance 80% of that. So, he had to show up, or she to show up, with $50,000, and on top of that, we estimate another 50 to 75,000 in working capital. So it's probably like 100 to 150,000 investment that a franchisee under the old model had to put up.

Now, the company had to build the building,--.

Right.

So, I'm not going to get into that because we've gone through all that, unless you want me to.

No, no. I've got an old report.

In the new model, what's happening is that a good number of our franchisees are changing build-to-suit developer -- changing IHOP for a build-to-suit developer. So some of our guys -- a good portion of our guys -- are saying, you know what? I know there's value in the land. I know that I have the money to do this, but you know what, I'm a restaurant operator. So IHOP's not in that game. Let me go to a build-to-suit developer, and he'll do everything for me and provide me a turnkey solution, and so the up-front cash investment is kind of similar, I think, in a lot of ways to when we financed it.

That isn't the case all the time.

That isn't the case all the time.

And then there are guys who are in the game not only because of cash flow from the restaurant, but because they believe in the intrinsic value of real estate and want to only assets -- invest in the assets as well. In that case, the investment is typically excluding land closer to 1.8 million, 1.9 million.

1.8 million, 1.9 million, without land?

Without land, and so it's a little less than that. It's a little less than that. It's like 1.6 million, 1.5 million, but that includes equipment, that includes building. It doesn't include land though.

Okay. So, then the land's probably another $0.75 million?

It depends where you are.

I guess that's true.

Well, thank you

Okay, Mike.

Thanks, Mike.

And your next question comes from Rachel Rothman from Merrill Lynch.

You may proceed.

Hi, Rachel.

Hi. This is Tolu. How are you?

Good.

Quick question on your remodels -- and I've probably asked this before -- but with your 210 complete, do you have any updates on actual sales with results from these remodels?

We're still not there, Rachel. We are slowly, but surely, collecting the data.

What we do have is a mix of some people doing extremely well -- I'm sorry, Tolu -- some people doing extremely well, and some people being flat or down, it's all over the board. We should have a better handle this year on what we've been able to get, but a lot of those guys haven't lapped a year's worth, they haven't got any comps yet, so I've been hesitant to release any data, but we should have more information, Tolu, this year.

Okay.

And then with the fall menu rollout in November, do you have any kind of average of how many menu items franchisees were able to eliminate, and what benefits they are experiencing with the food costs and operations improvements?

A lot of franchisees, Rachel, have been reticent to actually -- Tolu, I'm sorry--.

It's okay.

I'm sorry.

Have been hesitant to take a lot of the menu items off. What we have found is, with the options, the regional option preference, some of them have been lessening the number, little by little. So, maybe it's four or five here, or four or five there. Tolu, it's going to take a couple years for the franchisees to really see the full effect of taking those large portions of the menu out.

I do have some large franchisees, or larger franchisees, that have done that, and I think before the year is out, we're doing some analysis of those larger franchisees and what the impact has been for them in speed of service and food costs. When we have that information, we will share that.

Again, when you're 99.9% franchise, you have to get all of your data from franchisees. So, it may take us a while, but those are both good questions, and we will get those answers when we have more data available.

Can you repeat again what the average for the Cincinnati menu is, versus the average in the system?

Sure.

The average for Cincinnati is about 90, 95 menu entrees, and the average for the system is closer to 150, 160.

Okay.

Thank you. That's it.

Thank you.

Good questions.

And your next question comes from Mark Smith from Sidoti.

You may go ahead.

Hi, guys.

One quick question on G&A expense -- it came in lower than last year. It's going to be low guidance here for this year. After saying that you expect about 5% growth, are you still comfortable with your guidance of 65 to 67 million for '06?

You have to pull out $2.5 to $3.5 million for stock option expenses, alright?

Okay.

Because we want to make apples-to-apples comparisons.

So, Mark, we're shooting for that number. Our guidance is probably a little higher than that right now. We're going to do all that we can to [inaudible] to about that number, if we can.

Okay. Great.

Thank you.

Thanks, Mark.

And your next question comes from Patrick Stowe from Priority Capital.

You may go ahead.

Good morning.

Good morning.

A lot of my questions have been answered.

Just following up on the G-&-A question, you're obviously doing a very disciplined job of managing net [inaudible]. I was curious as to, in the fourth quarter, if that number was maybe a little lower than you expected in conjunction with the timing on the restaurant developments along with the CapEx being lower?

No. Patrick, it didn't have to do with either of those issues.

We -- the restaurant operations are totally captured within company operations and the company options segment, so no expenses fall out -- no material expenses fall out in the G-&-A. CapEx being lower a little maybe -- maybe it helped us out a small amount, but not a material amount.

You know, we just put in place a program and our folks had a mind-set during the year that we were going to manage aggressively to a low G-&-A number, and we were projecting for the full-year, and all of our numbers pointed to a lower number than what we had guided, but we just wanted to make sure that we delivered on our number, and so, when it came in the way it did, it came in a little below our expectations, but it was in a reasonable range of what we thought might happen if all good things fell together, and it seemed like, in the fourth quarter, all good things did fall together.

Yes, sure. I think you need to be commended on that.

I just wanted to make sure there weren't any pre-opening expenses or anything we were missing.

No, not at all.

No. No.

And can you -- just housekeeping -- remind me what's in the other expense line?

Yes. There are things like unit termination expenses. There's interest expense -- excuse me -- interest income is in that line. There are bank charges in that line. If we sell a real estate property, the gain will be in that line. So, it's a mix of a whole bunch of different things.

And not much that you could muddle out as recurring?

No, not really.

We've given guidance that the number -- one of the things that we do have in there is we have surplus property expenses. So, in the old days, we took a position on a lease, and we decided for one reason or another, the restaurant shouldn't operate anymore, we'll continue to pay rental expense out of that line. Now, hopefully, we've subleased that, and some of that expense is mitigated. So, it really is not terribly predictable, but the two things that you do know are that the lower our cash balance, the lower our interest income. So, that expense number will go up, and as time goes on, these surplus properties go away. There are about eight surplus properties. These surplus properties go away, and so we'll have less of an expense on that line, but everything else is really hard to predict.

Great, that's helpful.

That's all I have. Keep up the good work.

Thank you.

With no further questions, I'll turn the call back over to Julia Stewart for closing comments.

Thanks, operator, and thanks for joining us today.

Should you have any additional questions, as always, Tom and I are available. Just give us a call.

Otherwise, we look forward to speaking to you on our next conference call, which is to discuss first quarter 2006 results, which is scheduled for Wednesday, April 26.

Have a good day.

Thank you for your participation in today's conference.

This concludes the presentation.