Dine Brands Global Inc (DIN) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 IHOP earnings conference call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Ms. Stacy Roughan. Please proceed, ma'am.

Good morning, and thank you for participating on IHOP's fourth quarter 2006 and 2007 performance guidance conference call. Today with us from management are Julia Stewart, Chairman and CEO, and Tom Conforti, CFO.

Before I turn the call over to Julia and Tom, 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. We have a lot of ground to cover today, and Tom and I will be going back and forth in our prepared remarks to address all of the important topics in an orderly fashion. We will discuss fourth quarter and fiscal 2006 results, and then we will transition to a review of our performance expectations for 2007. Our prepared remarks are a bit longer than usual, so bear with us, and we'll get through the the information.

Before getting to a review of 2006 results, I would like to provide you with an update on the trademark registration issue that we recently disclosed. We became aware through our corporate refinancing due diligence process that a number of our existing trademark and service mark registrations had lapsed. Our common law rights in these trademarks and service marks were not affected. We believe that this is only a technical issue, and are taking the steps necessary to obtain new registrations for the affected trademarks and service marks. Over the past week and a half, we have revised our Uniform Franchise Offering Circular, or UFOC, and are back selling franchises in 45 states. In the remaining states, we have filed amended UFOCs and are waiting for the regulators to review them. We believe that any issues regarding the validity of our federal trademark and service mark registrations will not have a material impact on the business of IHOP Corp. or our franchisees. However, due to this trademark issue, our refinancing has been temporarily delayed. We expect to move forward with the completion of this transaction once the amended UFOCs are approved in all 50 states, which we expect will be concluded in the next several weeks.

So now turning to the fourth quarter 2006, let's get started with our earnings results. EPS for the quarter ended at $0.57, including pretax stock-based compensation expense. Excluding this expense of $1 million, EPS would have increased 15.1% to $0.61. Growth in earnings per share was primarily driven by a 3.8% increase in franchise operation segment profit, and a 4.2% reduction in diluted weighted average shares outstanding due to share repurchases made throughout the year. Now for the fiscal 2006, EPS was $2.43, including pretax stock-based compensation expense. Excluding this expense of $3.9 million, EPS would have increased 14.2% to $2.57. The increases resulted primarily from improved franchise operation segment profitability. This was primarily due to sales growth and new unit openings in 2006, coupled with modest expense growth in the segment. Additionally, continued share repurchases drove EPS higher, with a 6.7% reduction in diluted weighted average shares outstanding.

Now, during 2006, we repurchased approximately 889,000 shares, totaling $42.7 million worth of IHOP stock. We returned $18.1 million to shareholders through quarterly dividend payments last year. That's a total return of $60.8 million in cash to shareholders in 2006. As we guided at the beginning of 2006, share repurchases were expected to be below 2005 levels, due to covenant restrictions on our existing debt and the timing of refinancing. While we did not purchase shares in the fourth quarter, we are increasing leverage through our refinancing efforts underway, and plan to dedicate substantially all of the proceeds from our refinancing after the retirement of our existing debt to share repurchase. Since 2003, IHOP has returned approximately $277 million to shareholders in the form of share repurchases and dividend payments.

Turning to sales, system-wide same-store sales increased 2.5% for 2006, which consisted of a healthy increase in guest check traffic that outpaced a moderate increase in guest check average. Compared to an exceptionally strong 5.4% growth in the same quarter last year, system-wide same-store sales increased 0.4% for the quarter -- for fourth quarter 2006. This growth consisted entirely of an increase in guest traffic that offset flat guest check average results. Our ability to drive positive traffic throughout the year, counter to what most of the industry at large experienced in 2006, reflects the strength of our marketing and operational strategies, as well as pricing moderation demonstrated by our franchisees, which reinforced IHOP's price-value relationship with guests. Same-store sales growth for the fourth quarter 2006 was supported by the solid performance of our limited time offers, French Toast Fantasy and Super Rooty Tooty, in addition to the introduction of an enhanced system-wide menu and increased gift card sales during the holiday season.

Turning to franchise development, franchisees and our Florida area licensee developed and opened 65 new IHOP restaurants in 2006, 24 of which opened during the fourth quarter. We opened four new Company-operated IHOPs in our dedicated market of Cincinnati in 2006. This R&D market now stands at a total of ten restaurants. During the quarter, we added commitments for franchisees to develop 33 new IHOP restaurants over the next several years. As of year-end, our franchise development pipeline included 470 restaurants signed, optioned, or pending to be developed by franchisees in the U.S., Canada, Mexico, and the U.S. Virgin Islands. We ended the year with 182 restaurant remodels completed by franchisees, which brings the total number of ICON package remodels completed to date to 351 restaurants, or 27% of the IHOP system.

Now let me address remodel ROI. As we have communicated in the past, results can significantly vary from restaurant to restaurant. As a result, determining an ROI is problematic, and therefore we cannot share ROI information. The ICON remodel should best be thought of as a key strategic investment for our franchisees, particularly as IHOP has not required an extensive remodel in years. It's the right thing to do for our brand to remain competitive.

Moving to operations excellence. We ended the year with a substantial percentage of IHOP franchisees, rated as an A or a B operator. It is now time for us to raise our expectations and set the bar higher to drive a whole new level of operational excellence at each IHOP restaurant. In 2007, we will put in place new tools and processes to elevate our system's operational standards and begin to measure our progress in new and more effective ways.

In all, 2006 was a solid year of strategic execution and financial performance for our Company, which resulted in two impressive milestones. Now, in addition to recording our 16th consecutive quarter of positive same-store sales growth, we crossed the 1,300 restaurant mark, and surpassed the $2 billion mark in system-wide sales. What was particularly amazing to me was that it took IHOP more than 40 years to reach the first billion in annual system-wide sales, and only seven years to reach the second billion. It is a true testament to the collective efforts of our franchisees, employees and vendor partners, as we continue to drive ourselves to become number one in family dining. With that, I would now like to turn the call over to Tom Conforti, our Chief Financial Officer, for a more detailed discussion of our fourth quarter and fiscal 2006 performance.

Thanks, Julia. And good morning, everyone. Julia has just covered our EPS results, so I'll walk you through the key drivers of that EPS performance for the fourth quarter and full year 2006 in more detail. Let's start with G&A. We experienced a 7.5% increase to $17 million in G&A expenses for the fourth quarter 2006. This was primarily due to approximately $1 million in stock-based compensation expense. If you remove this stock-based compensation impact, G&A expenses for the quarter would have grown a modest 1.7%. For the full year, reported G&A grew at 8.1% to $63.5 million, which came in at the low end of our guidance for the year. Excluding stock-based compensation expense, G&A growth would have been 1.9%.

Moving to segment performance, let's start with our core business franchise operations. Revenue grew 5.4% for the fourth quarter, and 7.1% for fiscal 2006, driven by higher retail sales as a result of growth in same-store sales, as well as growth in the number of effective units. For the year, franchise retail sales increased due to a 4.6% increase in effective units and a 2.5% increase in same-store sales. On the expense side, franchise operations expense increased 7.1% for the quarter and 5.5% for fiscal 2006. Our ability to moderate franchise operations expense growth throughout the year was primarily due to the elimination of MICROS point of sale incentives to our franchisees, as well as a reduction in the amount of financial relief granted to franchisees at certain underperforming restaurants. We leveraged our top line performance in this segment to produce an 8.6% increase for the full year.

Turning to the rental operation segment, rental income increased 1.6% for the quarter and was flat for the year, consistent with our long-term guidance that this segment should be essentially flat as we manage our existing rental relationships. Rental expenses decreased 1.5% for the quarter and 0.5% for fiscal 2006. Rental operation segment profit increased 11.4% for the quarter and 2.9% for the full year due to same-store sales increases. Company operations performance for the quarter resulted in a loss of $724,000 versus a loss of $344,000 in the prior year. For fiscal 2006, we reported a loss of $2 million in Company operations. These losses are largely due to lower sales levels at recently opened locations in our Cincinnati market. At the end of the fourth quarter, we operated only ten IHOP restaurants, primarily for R&D purposes, all of which are located in our dedicated Company market of Cincinnati. As we mentioned on our last call, we have new leadership for our Company operated restaurants, and we're making great strides toward improving the financial and operational performance of each and every restaurant.

Finally, turning to financing operations, profit in this segment increased 17.4% for the quarter, but decreased 13.9% for the fiscal 2006, as expected, as we continue to exit old model sources of revenue. This decrease for the year was primarily due to the continued decline of long-term note balances and the resulting interest income recognized in this segment related to the receivables run-off. In addition, our net gain from the sale of franchises and equipment was unfavorable to 2005, partially due to the fact that 2005 included a gain of $600,000 for the sale of a unit with no similar recorded gain in 2006.

Turning to cash flow, the increase in cash provided by operating activities was a key highlight, increasing 17.2% to $64.9 million for fiscal 2006. This increase was primarily due to the realization of a $14.7 million benefit from the reclassification of assets for tax purposes related to a cost segregation study we completed in mid 2006. This amount was offset somewhat by our audit settlement with the IRS, which netted out to be $7.9 million for the year. After nearly a three-year audit process, we are pleased to bring this topic to a close. CapEx totalled $9.4 million, an increase of $2.1 million versus fiscal 2005, which primarily reflects the development of our Company market in Cincinnati. As a result, free cash flow, which we define as cash from operations, less CapEx, increased 15.5% to $55.4 million as of the end of 2006. Our cash flow was augmented by $17.8 million during fiscal 2006 for the systematic run-off of our franchise and equipment notes receivable. This brought total cash generated, that's cash from operations, plus the receivables run-off, to $82.6 million. That's more than $4.50 of cash per share for fiscal 2006. With that, I'd like to turn the call back to Julia.

Thanks, Tom. Now I'd like to transition to a discussion of our expectations for 2007, from both a strategic and financial perspective. Over the past four years, the success of our core restaurant franchising business has been guided by three key strategies: Energizing the brand, improving operations, and maximizing franchise development. These strategies remain intact for 2007, and will continue to guide our efforts as we look to further strengthen the IHOP brand. Looking at ways in which we will grow the brand this year, we've taken steps to increase our national advertising presence with more efficient media-buying strategies to support our six planned limited time offers in 2007. As we've shared in the past, for 2007, we are continuing to secure additional dollars for national advertising efforts, with franchisees redirecting some of their local advertising contribution towards the national advertising fund. This allows IHOP to reach our target audience more frequently and in more effective ways through an increase national presence.

A portion of our national spending in 2007 will include advertising for our new carryout program, IHOP 'n Go, which launched system-wide just yesterday. Although difficult to measure, we estimate that to-go currently makes up approximately 2% of total sales. We hope to see that increase to as much as 3% to 4% over the next year, as our new program goes into effect. We will also continue gift card optimization efforts and pursue additional menu enhancements, with one planned system-wide menu update in October of this year.

Turning to remodel expectations, we expect another 220 franchise remodels to be completed, which will bring the total number of existing restaurants remodeled to approximately 570 IHOPs, or close to half of the system, by the end of 2007. As I mentioned on our last call, improving operations in 2007 will center on breaking through to the guests with dramatically improved levels of service. To accomplish this, we are moving forward with operational tools and a new restaurant training program, among other initiatives, to help ensure that we are delivering service as good as our pancakes, with every order, every day, at every IHOP restaurant. We'll have more details to share with you on our next call.

Moving to franchise development. With more than 1,300 existing IHOP restaurants and 470 more committed, auctioned, and pending restaurants in the pipeline, we believe that IHOP could ultimately grow to as many as 1,900 units in the U.S., with incremental growth opportunities throughout Mexico and Canada. We sold nearly all of the available territories in the U.S., and will increasingly focus on securing international development commitments in Mexico and Canada, without an added expense base to support this growth. Now as you can tell, there is still upside present in each of our core strategies, and we will continue optimizing our approach in 2007. Opportunistically, we will augment our efforts with initiatives designed to extract further value from the IHOP brand and leverage our core competencies. For example, in 2007, we are examining potential product licensing opportunities that could increase our brand's reach to your local grocery store. We are leveraging the licensing experience that a number of our management team members possess, and are working closely with our franchisees to make this a win-win proposition. If successful, licensing would establish another source of ongoing income and cash, in a low-risk, low-investment fashion.

We're also thinking beyond the four walls of an IHOP restaurant as we examine opportunities to take advantage of our core equities, and apply them in ways that could allow consumers to access the brand differently. Our efforts around brand extension are in the very early stages. But at the heart of this process is the drive to be forward-thinking and identify opportunities to deliver the IHOP brand and our signature products in a new and different way. Additionally, acquisition remains a viable growth avenue for our Company. Our franchising expertise is a significant leverageable advantage we believe can be successfully applied to another restaurant company seeking to expand through franchising. Specifically, we are looking for a noncompetitive restaurant concept that is already franchising, or able to be franchised, that is of sufficient size and could be acquired at a reasonable price. While identifying a suitable candidate in this market has been a challenge, we will continue to seek out and evaluate acquisition opportunities in 2007.

Now turning to our performance expectations for 2007, I'd like to walk you through our financial guidance for the year. First, let's start with earnings. We expect earnings per diluted share for fiscal 2007 to range between $2.50 and $2.60. Our 2007 earnings guidance takes into account the following key assumptions: We expect same-store sales growth between 2% and 4% this year. As always, our goal will be to grow sales through a healthy balance of traffic gains and guest check increases as we remain dedicated to protecting and strengthening our price-value relationship with our guests. We expect franchisees to open between 55 and 60 new IHOP restaurants in the U.S. in 2007, while our area licensee in Florida should open approximately three new IHOPs. We do not plan to open Company restaurants in Cincinnati in 2007 due to timing issues. But we anticipate a couple of Company restaurant openings sometime next year. Finally, we expect franchisees to open three new IHOPs internationally in 2007. Therefore, total new unit openings should range between 61 and 66 for the year.

As you know, G&A management is an important operating lever, and our goal is to keep this expense growth moderate, ranging between $65 million and $67 million for 2007. Our EPS guidance also assumes the successful completion of our refinancing, and reflects our best timing and cost consideration at this point. Finally, our EPS expectations also take into account a substantially increased level of share repurchase in 2007. With the expected completion of our refinancing in the near term, we plan to increase our balance sheet leverage. Once the refinancing is complete, and after the repayment of our existing debt, substantially all the proceeds will be dedicated towards share repurchases. Beyond maximizing our operational performance, we believe increasing share repurchases will have an important impact on further enhancing shareholder value and driving EPS growth this year. Now I'd like to turn the call back over to Tom to review our segment performance guidance, cash expectations, and other key financial metrics in 2007.

Thanks, again, Julia. Let's start with an explanation of the impact we expect refinancing to have on our overall financial performance for 2007. As many of you know, when we decided to refinance the Company and take on additional debt, we made the decision to increase available cash to enable greater share repurchases, with the trade-off being higher expenses associated with this increased leverage and the costs of taking out our existing debt. While we expect to provide further guidance with the completion of our refinancing, I did want to give you a sense of some of the items reflected in our guidance. This year, we expect to have a one-time write-off of past deferred financing costs, and a prepayment penalty related to the early payment of our existing debt. Our refinancing is also accompanied by increased deferred financing costs going forward, as well as higher interest expense due to our planned increase in debt. While these costs are expected to impact our net income performance, we expect a substantial commitment to share repurchase this year to drive EPS.

Now turning to our segment profitability guidance, let's start with franchise operations. We expect franchise operations profit to range between $102 million and $106 million in 2007. Franchise operations represents our core franchising business, and growth in this segment is driven by same-store sales growth, fees generated from new IHOP openings, as well as the benefit of additional operating weeks and royalty payments associated with new restaurant openings in 2007. Weighted average royalty will be approximately 4.3%, which is slightly lower than our standard 4.5% royalty rate. This is the result of deals cut on restaurants refranchised over the past few years, as well as lower area licensee royalty rates. As we have shared in the past, the sale of proprietary pancake and waffle mix is also a significant profit contributor in franchise operations, which equates to approximately 68 basis points of total system-wide sales. We expect franchise operations expense to be essentially flat versus 2006.

Turning to rental operations, we expect rental operations profit to range between $34 million and $36 million in 2007. This is our second most profitable segment, and growth in rental operations will continue to be flat to slightly up for the foreseeable future, as we work to retain profitable relationships among our franchisees, IHOP, and the landlords at 725 IHOP locations nationwide. Upside in this segment is driven by same-store sales growth, as approximately 40% of our lease agreements are tied to restaurant sales.

Moving to financing operations, we expect financing operations profit to range between $7 million and $9 million in 2007. Financing operations represents financing activities under our old business model, and will continue to be a declining segment due to lower interest income on note balances, which continue to decline over time. This segment also contains interest expense related to our conventional debt. We expect that interest expense will be increasing on an annualized basis due to our decision to increase the Company's overall leverage ratios. Finally, we expect Company operations to produce a loss in 2007 between $1 million and $1.5 million. Company operations primarily reflects the performance of our Company-operated restaurants in Cincinnati, as well as the cost of potential restaurant take-backs. While our focus in Cincinnati this year will be to reduce losses in the market, we view our Company market as an R&D expense, and encourage you to do the same. Our goals for Company operations are to refranchise restaurants taken back from franchisees, without taking possession of the unit whenever possible, and ultimately to operate Cincinnati IHOPs at, or slightly better, than break-even.

Moving to G&A, our long-term goal is to limit G&A expense growth to a moderate 3% to 5% annual growth range. While salary and benefits make up approximately 60% of G&A, discretionary spending will be prioritized toward initiatives designed to support same-store sales growth, enhance the IHOP brand, or drive operational improvements. This will include such projects as R&D and the development of tools and systems designed to help franchisees' profitability.

Now, turning to other expenses. This is a line item that we've not provided guidance on historically. However, with our refinancing, there will be several costs related to securitization captured in our other expense line. So we wanted to provide performance expectations on this line, as well. We expect other expenses to range between $10 million and $11 million in 2007 versus $4.7 million last year. In addition to impairment and closure charges and other miscellaneous items, which have been captured in this line in the past, other expenses will also reflect the amortization of deferred securitization costs, the write-off of existing deferred financing costs, and prepayment penalties on our old debt.

Turning to cash, we expect cash flow from operations to range between $60 million and $65 million in 2007. Cash from operations is expected to decrease from 2006 levels, primarily due to the absence of the large one-time cash benefit associated with the cost segregation study completed last year, that drove cash from operations higher in 2006. We expect CapEx to range between $6 million and $8 million. Approximately $2 million of CapEx is allocated to building a pipeline for Cincinnati openings currently planned for 2008. Approximately $2 million of our CapEx guidance is dedicated toward optimizing our information technology infrastructure, a portion of which will be dedicated to a disaster recovery system. And the balance is earmarked for miscellaneous use.

As you know, each year our cash performance is augmented by the systematic run-off of franchise, equipment and direct financing lease notes receivable. In 2007, this is expected to produce additional cash in the range of $16 million to $18 million. Therefore, we expect to generate between $76 million and $83 million in cash, which reflects the expected combined contribution of cash from operation and our receivables run-off in 2007. That translates to as much as $4.50 per share for fiscal 2007. Now, I'll turn the call back to Julia.

Thanks, Tom. I hope you all have found today's discussion helpful. Our strong financial performance this year and outlook for 2007 not only demonstrates the power and attractiveness of our franchise business model, it is also evidence of the successful financial formula we established four years ago; same-store sales growth and new franchise restaurant openings, coupled with disciplined expense management and value enhancing share repurchases. Since transitioning to this new business model, we have reenergized our brand in an unprecedented way. We have turned in 16 consecutive quarters of positive same-store sales growth, a level that few other players in our industry have achieved. Franchisees continue to develop and open new IHOP restaurants in numbers substantially higher than any of our closest competitors. And this pipeline is not slowing any time soon.

Finally, our improvements in all aspects of our operational execution have been dramatic and sustainable. And now we're raising the bar with a focus on making our service as good as our pancakes. And while we have been doing all the right things for the brand, we have also been delivering for our shareholders, as we deploy our capital in ways that create value, returning a total of $277 million through share repurchases and quarterly dividend payments. That's the equivalent of approximately 55% of our total market value at the point when we initiated our cash return to shareholders in early 2003. We are extremely pleased with our track record, and look to making 2007 an exceptional year for our shareholders, our franchisees, and our employees. So with that, Tom and I will now be happy to take your questions. Operator?

[OPERATOR INSTRUCTIONS] Mike Smith, Oppenheimer.

Just one housekeeping thing, first. What were system-wide sales in the fourth quarter?

24% -- system-wide sales -- are you talking about growth or aggregate sales numbers?

Aggregate sales numbers.

Hold on, let us get that for you. Around $500 million, all told, approximately.

Okay. Julia, acquisition. Tell me more.

Well, not much to say. I mean, as I said, I'm really not at liberty to discuss anything, other than to say that, as I said on the scripted piece, we continue to look and opportunistically that's what we're doing.

Okay. And you did say it would be not another breakfast sort of concept, right?

No, I've always said we never would purchase anything that is in our space competitively, because I would never want to interfere with our current franchisees' business. So I've always said it would not be in the family dining category.

Is it your thought that you would market this new concept to your existing franchisee base? Or to a different audience?

I think both. I think I've always said that some of our existing franchisees would welcome the opportunity. But I think we would also look to bring in new talent from other concepts or other businesses. So it would be a mix.

In the refinancing package that you, I guess, have negotiated but haven't closed yet. Do we have any idea of what the magnitude of that is? And what the magnitude of your stock buyback program might be in total for '07?

Yes, Mike, we have a sense of it all. We're not comfortable, since we've not concluded our efforts, to really discuss in any detail what those numbers might be. And there are limitations, as you might imagine, on the private placement of notes about what we can say about it.

I just wanted to make sure that I didn't know because you hadn't told, and not because I haven't read the right piece of paper. So, anyway, thank you very much.

Mike, let me answer -- .

Oh, yes, I'm sorry, we did say that we were going to raise $200 million. Is that what your question was, Mike?

Yes.

I apologize. Yes, $175 million term, $25 million variable funding note. So it's $200 million in total.

Mike, did you want to know about the shares that we would be repurchasing in 2007?

I know what your authorization was. I guess you're borrowing $200 million, and you're going to be repaying your notes mostly with that, right?

Well, we would pay back the note. We also plan to buy back a significant portion of the 2.2 million shares that remain on our authorization. We have 2.2 million shares left on our current authorization.

Okay. Thanks.

Bryan Elliott, Raymond James.

Tom, don't quit your day job.

You didn't like the service as good as our pancakes [inaudible]?

I hope I don't see you on American Idol. Just some clarifications on some of the guidance. The G&A expense of 65 to 67. I assume that includes an option expense?

Yes.

Of roughly similar, up some from this year?

Similar to up some.

Okay. Can you help us -- all of the costs associated with the refi, including extra -- or, no actually, the extra expense would be elsewhere. The difference in the other income between what you guided to and the four and change we saw this year, could I take that as a good estimate of your one-time costs that you've talked about associated with the refi, the write-off?

No. No. In that number, Bryan, I think we did about 4.7 in '06. Typically, we set aside a couple million dollars a year for impairment -- expected impairment in closure -- or, the anticipated impairment and closure for the year. And so in our guidance for 2007, we've reflected a couple million dollars that we set aside for impairment and closure. In 2006, we didn't incur any significant impairment and closure. So part of that difference is attributal to the fact that we're budgeting for potential impairment and closure in '07, but we didn't utilize any of it in '06. So that explains a portion of it.

Okay.

Another component of it is the write-off of what's on our balance sheet on existing debt, as well as what we project, and it's all very dynamic, toward the prepayments associated with our existing debt. And then the final piece is just higher deferred financing costs as we go forward.

Right. Which will be ongoing. Okay. I had one other, I thought. Oh, you mentioned on the franchise ops guidance, you went through the sort of revenue drivers and then mentioned that expenses, I believe, just want to clarify that I heard it right, expenses in fran operations would be flat versus '06?

That's correct. That's what I said.

I assume that's in dollars?

Yes, in dollar amounts, correct.

Thank you.

Mark Smith, Sidoti.

Just a couple quick ones for you today. First, can you just tell us why no share repurchases here in the fourth quarter?

There were a couple of things, Mark, the most important of which is, as we were structuring our securitization, we had to fund to enable the securitization a certain level of capitalization, a new legal entity, that we had to set up, that would be the successor franchising entity in the securitization structure. And so we had to fund that. And that left us very little cash available at the end of the year to use to repurchase shares.

Okay. And then second, can you talk about of your pipeline of 470 or so restaurants, how many of those are slated for outside of the U.S.?

About 25.

About 25. Okay. Thank you.

Michael Gallo, C.L. King.

Just a couple questions. First, I was wondering, as you've rolled out to-go, I know you mentioned about 2% of sales pretty quickly. I was wondering, are you seeing any cannibalization at all on your dine-in business? Or are you seeing pretty much all incremental at this point?

The 2% mix number that I mentioned was before we ever rolled out to-go. So that's our baseline, that's without ever doing anything. As with any business, some of your business is just to-go. In our test markets that we rolled out to-go late last year, we did very, very well. So we anticipate doubling the number 2% to closer to 4% by the end of this year. But again, we literally rolled it out yesterday.

Understood. Just wanted to clarify that. Second question I have, just on the Company operations, it looked like the loss in the quarter as a percentage of sales, really had increased throughout the year. I was wondering whether we should look for that to kind of gradually improve as we go through 2007? Obviously, based on what Tom gave in segment guidance, you would expect an improvement in the losses overall for the year.

Mike, you're right on with that. We do expect a reversal of the trend of losing more money. We have a new operator in the market who has already identified ways to save 400 to 500 basis points in costs. And so, we also need to work on the top line, of course, Mike. But we've already identified some real discernible saves that will translate into better bottom line performance almost immediately.

Okay. Great. And then just final question, just to kind of follow-up to Bryan's question. The difference between the $4.7 million in other expenses in 2006, and the roughly $10 million to $11 million estimated in 2007, are items that are one-time related, whether it's projected, potential impairment, or write-off of deferred financing costs, or just other kind of non-ongoing items related to your business.

A couple of million is associated with impairment and closure. A certain amount will be related to those one-time charges. But then, to set up the securitization, we've incurred costs that will be amortized over the term of the deal. So a couple of that -- some of that money will be associated with deferred financing costs that will be with us for a few years.

Okay. That's helpful. Thank you.

Bryan Elliott, Raymond James.

Julia, just wondered if we could get a little more color on what you think is happening in Cincinnati? You referenced new stores underperforming. Can you give us a feel for -- I know, same-stores is definitional, but maybe broaden the definition to some of the older stores that came out of the ground pretty strongly. Are we seeing a big honeymoon pull back in those? Or is it more a cannibalization issue? Just what's your read on the sales decline there?

Actually, I think it's all of this above. The work that we have done is that some of this is truly cannibalization. We knew as we built out this market faster than most people would do. Most people don't build that many restaurants in that short a period of time. Some of it is related to cannibalization, some of it is some of the honeymoon is over. Some of it, as I mentioned I think one or two calls ago, we brought in new leadership. And I've seen a huge difference just in the short period of time he's been there, i.e., stabilizing the marketplace, turnover has been reduced substantially, that sort of thing. I also believe the fact that -- and it is timing that we just aren't opening any restaurants in '07, I think that works in our favor, just to stabilize the marketplace, do all the right things. But we put a lot on that market in a very short period of time. As I said last year, some of this is us, just pushing so hard, so fast, making them test so many things, and opening so many restaurants at once. So I see '07 as sort of a leveling out, and to your point, really being able to hone in and make those basic issues better, and also minimize the profit loss. So I think it's all the above.

I know one of your goals there, and if I recall correctly, and I may be remembering this wrong, but one of your goals was to drive lunch and dinner, and have a more balanced sales results through the day parts. And my recollection is you had some good success with that initially. And can you update us on the status of that?

It's still -- that's a great question. I love answering it. It's still very much the same. It's about a quarter at breakfast, a quarter at lunch, a quarter at dinner, and a quarter at late night. So those numbers have not dramatically changed. We have seen that opening up 24/7, that has all worked in our favor. So that's the good news.

All right. And I'm still waiting on your e-mail to tell me what the next question should be. [laughter] All right. Thanks.

Rachael Rothman, Merrill Lynch.

Can you talk a little bit about your choice as a financing vehicle to use a securitization instead of just private placement notes, or some other term -- type of financing and what you see as the risk reward of that?

The one thing I'll say is that securitization, and we've said this more than once, provides us with maximum flexibility. And that is really why we chose that avenue. It does provide for all the maximum flexibility that we could possibly want. But Tom, you may want to add on to that.

No, I think, Rachael, when we went through the process of considering all of our different options, there were some that were pretty easy to write-off immediately. We wouldn't get the flexibility, the ability to borrow more if we decided to do it, and at rates that were undesirable. But it came down to a couple of different options. And I think the reason that we chose securitization, is exactly what Julia said. It gives us maximum financial flexibility going forward. And so we talked about different strategic alternatives, that might be M&A, that might be additional share repurchase. And there's nothing like securitization, that gives us the flexibility to be able to execute against any of those alternatives that the Board decides to pursue.

Okay. And can you talk about maybe in your background, I don't know if you were a part of this, but I seem to remember, Julia, that kind of in the, call it 1993-ish, or early to mid '90s, Taco Bell did a bunch of product licensing?

That is correct.

Can you talk a little bit about your ability to leverage the existing infrastructure that you have to make the pancake batter? Or is that done by a third party? Or how should we think about sales and profitability from that avenue going forward?

Well, there's two things, and I'll sort of answer the first part. It's a great question. And then Tom may want to add on. First of all, we have a lot of the team members here in management have experience with licensing in their prior lives. So I'm very comfortable that we've got some expertise. And secondarily, it was never our intention to take that on. It was always our intention to outsource that manufacturing, think of it to a third party, co-packers, whomever. But it would not be associated with us. So it's like I said in the call, it's a low risk, low investment proposition. But it's an opportunity for us to substantially extend the brand with quite a bit of ease. But you may also want to -- .

Rachael, if I can just add a little to what Julia said. We like businesses that don't require capital, that generate cash flow. We've demonstrated that in the way we've managed our franchising business. And so the way we would structure our licensing business is exactly the same way. Our asset is our intellectual property. We're enabling someone who is in that business, who would make the appropriate investments in marketing and retail relationships and manufacturing, and who have the expertise and competency in that area, and the desire to use their balance sheet to build a business, to the advantage of our brand and our shareholders. And that's why, whenever we can seek out businesses where we can generate cash flow without a commitment of CapEx, we tend to consider those terrific businesses.

One other thing I'll say to that, is I think we've done a pretty good job to this point of working with our franchisees so it's a win-win. Your worst nightmare is waking up one morning and telling your franchisees, oh, by the way. So I think the fact that we've been involved with them every step of the way and working hard to make this a win-win, has made them fairly open-minded to the idea, as opposed to hating the notion.

So you guys would just collect some sort of licensing?

That's all -- we would basically give them our brand. We'd make sure that the brand was managed carefully. So our marketing team would be involved.

QA.

QA. We'd make sure the product was positioned from a quality perspective, right where we want it. But all of the investment and the day-to-day execution of the business rests with the licensee. And what we end up doing is collecting checks, which is a competency of ours.

Perfect. And then can you talk a little bit about -- you guys were very successful in refranchising underperforming units. And like you talked about in this call, getting them back into the hands of the people before you take possession of them. Can you talk a little bit about what the critical success factors are in that, and how you're able to work with franchisees to acquire sites that may be underperforming at the time you do the transaction?

Thank you for asking that. That really has become a core competency of ours. First and foremost, we have now systems and tools in place that spot somebody early on that may not be performing to the right level. So we know very, very early on if there is a weakness in the performance, sit down with that franchisee, and determine what is the best course of action. Is it taking back that restaurant and refranchising it? Is it providing a rent relief structure? Is it working with that franchisee? What is the best mechanism? And I think the system we put into place over the last couple of years has just been flawless. We have an entire team dedicated to that. And then frankly, depending on the avenue we choose, then we go down that avenue fairly quickly. And it has been working for us, frankly, flawlessly to this point. So we really -- and we'll continue that process. Think of it as a group that meets almost weekly to look at any weakness in the performance, and then literally put up a process in play which may go down one of several different paths. And frankly, we've just been highly successful with that strategy.

Rachael, one of the other things that works in our favor, it's really mostly what Julia said. But the other thing that works in our favor, is there is this latent demand in our system for old model units. Now we will not -- we will not use this refranchising for new model units, because we don't have sort of an ongoing financial obligation in new model units. But in old model units, because of we're on the lease in many cases, it's to our financial advantage to make sure that restaurants continue to operate, and that we're getting -- we're maximizing the present value of cash flow. And so our franchise and development team does an excellent job of identifying units early on. And then there's this huge latent demand for these old model restaurants. And we're able to find ample opportunity to refranchise these restaurants.

Good point. Very good point.

Perfect. Thank you so much, guys.

Cyrus Hadidi, JMB Capital.

Quick question. I'm trying to bridge your guidance for '07 to your share buyback authorization, as well as the categories of one-time expenses. Would it be fair for me to look at the other expense guidance of $10 million to $11 million versus the 5 last year and say, the bulk or all of that is one-time expenses associated with the securitization?

Cyrus, there are really three components. One is every year we set aside about $2 million for impairment and closure. In 2006, we didn't incur any impairment and closure, but we budgeted it for impairment and closure in 2007. So a couple of million of that $6 million difference is associated with sort of the way we run our business and the way we account for our business. So I'd pull that out and just assume that $2 million of the $6 million is stuff that the Company has always done, just didn't have to do it in '06. May have to do it in '07, just providing for it. The other $4 million, a part of it, Cyrus, is one-time associated with the write-off of existing deferred financing costs that reflect sort of the up-front costs associated with old debt that we have on our books currently. Plus, we do have a prepayment penalty for getting out of those private placement notes. And that leaves a couple million or so in incremental deferred financing costs as we go forward. And that's sort of the break out, in very rough and general terms.

Okay. I'll call you after and we'll follow-up.

Patrick Stowe, Priority Capital.

Thanks for taking the call. Wondered if you all could comment. You talked about expecting 2% to 4% comps in the coming year. And I wonder if you can just talk about how menu pricing will affect that? I know in the last couple of quarters you've driven your comp growth through, I guess, exclusively through traffic. So are you expecting franchisees to take some pricing?

Actually we've just completed a new menu that went in in November-December time frame of 2006. And the franchisees at that time took about, about a 2% price increase.

Okay.

And we don't see another new menu until October of 2007. Now, at any given time, a franchisee can choose to reprint their menu. But by and large, I think they're really holding fast to this idea to minimize price increase, and really maximize price value. So I don't think you'll see a lot of that. And I think most of the people who wanted to take a price increase, I think seven states had their minimum wage go up. And those seven state franchisees largely took their price increase in October, or took it at the beginning of January. So I think you're pretty much really focused right now on a traffic building mode. You may see small pockets here and there. But by and large, I just don't think we'll see it this year.

Okay. Do you hear anything from the franchise base about food cost inflation? Or is that an issue that you see going forward?

Well, we've done a really good job, our procurement team working with the franchise procurement team. They've done a really good job of doing some forward buying and some large purchases. So that hasn't been as big an issue as labor. I've heard a lot more from the franchise community this year about frustration with labor increases, some compression, we still have several states where there is no tip credit. We're in one where a lot of these guys have to pay premium minimum wage to food servers. So that's an ongoing issue. I've heard more about labor than I probably have food cost as of late.

Okay. That's helpful. Kind of a house cleaning item. Any way you can give us the portion of the financing expenses in '06 that were actually interest expense on the notes?

We aren't able at this point because we really haven't closed the deal yet. But you could probably back into it and get in the ballpark. But we just don't feel comfortable disclosing anything until we get the transaction done.

Just in thinking about '06, can you give me kind of a ballpark interest rate financing cost?

On our -- .

On the notes you're retiring.

On the notes -- our average cost of debt on the notes that we're retiring was around 6%.

Okay. That's all I need, I appreciate it. And then just on the share repo, you might have said this and I missed it. And I think it's a pretty safe assumption, but I guess there will be some incremental proceeds from the new financing that you've said go first priority to share repo. I assume that remains a priority with this pretty healthy free cash flow that you'll be generating, as well?

Yes. We said we planned to buy back a significant portion of the 2.2 million shares that remain on our authorization once we've retired our existing debt.

Okay. And lastly, I guess can you just comment maybe broadly on any effects you've seen, or effects or non-effects you might expect from just incremental competition in the breakfast day part? It seems like I see increasing releases from some of the QSR names that talk about either experimenting with breakfast or reemphasizing breakfast. Do you see that as a pressure going forward?

I get asked that question probably more than any other question. And I always answer it in two parts. One is I think whether it's Starbucks or a fast food chain or anybody out there who's getting in the breakfast business and advertising it, that's just good for us. More advertising about breakfast makes more people aware of breakfast, and we benefit from that. And I think secondarily, some of what you heard today on the strategies that we are going forward, really look to making certain that we are maximizing our breakfast business, and that we are absolutely holding on to our franchise, vis-a-vis to-go, vis-a-vis gift card, vis-a-vis alternate ways to extend the brand and licensing, and further brand extension. Those are all ways I think we continue our aggressive competitive set in that realm. So it's both -- gosh, I think it's great that people are getting into the marketplace. But I'm also keeping one eye firmly on the rearview mirror, and thinking creatively about other ways that we can get our guests to access our brand.

Okay. Great. Well, I appreciate the time, and wish you continued luck.

Mike Smith, Oppenheimer.

Tom, going back to your question somebody asked you earlier about the $10 million to $11 million guidance for other expense. And as you went through your explanation there, it sounded like the write-off of the old deferred charges plus the prepayment penalty would be about $2 million?

In the ballpark.

Okay. And then would it be fair to assume that when we get into '08 in our model, that we should probably look at -- well, plus you're saying that the category should be around $6 million. Should we have it be around $8 million, due to the deferred payment charges going forward?

Yes, we don't make comments that far. But you -- .

I just wanted to make sure I was doing the math right. I think -- . Didn't want to ask you -- ?

-- 10 to 11 minus 2, so -- .

Okay. Thanks a lot.

I would now like to turn the call back to Ms. Julia Stewart for closing remarks.

Thanks for joining us today. Should you have any additional questions, as always, you know Tom and I are available to take them. Otherwise, we look forward to speaking to you on our next conference to discuss first quarter 2007 results, which is scheduled for Wednesday, April 25th. Thanks so much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.