Dine Brands Global Inc (DIN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Applebee's International first quarter 2007 earnings release conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's program, Ms. Carol DiRaimo. Ms. DiRaimo, you may begin.

Thanks, Howard, and good morning, everyone, and thank all of you for joining Applebee's first quarter 2007 conference call. This call is being broadcast simultaneously over the internet. With me today are Dave Goebel, our Chief Executive Officer, and Steve Lumpkin, our Chief Financial Officer.

As most of you know, we issued a press release on April 26th that provided an update on the activities of the Strategy Committee of the board. In that release, we announced the strategic process has yielded several non-binding, preliminary proposals to acquire the Company and as a result, we've entered into a second round of detailed due diligence discussions before asking potential buyers to submit definitive binding proposals. Concurrently, the Strategy Committee continues to evaluate a possible recapitalization of the Company. The Committee also is continuing to review our returns on capital, the mix of Company-owned versus franchise restaurants, our overhead cost structure and strategies for improving same-store sales. We are also exploring a securitization of our royalty income stream and other assets. Such a securitization could be used in either a recapitalization or by a potential buyer of the Company. It is premature to comment on the likelihood of potential values in our recapitalization or sale relative to other options the Strategy Committee is evaluating and there can be no assurance that any transaction will be pursued, or if pursued, that it will consummated by the Company.

With that said, our agenda for today is similar to last quarter's given the circumstances. I'll turn it over to Dave in a second for a few brief comments and then to Steve to drill down into the first quarter numbers and address what we anticipate are the most common questions. Because certain strategic alternatives could affect our results, we have not reissued fiscal year 2007 guidance. As I'm sure most of you understand or expect, we will not be holding a Q&A session this morning as we would be unable to respond to any questions about the strategic alternative process or our forward-looking guidance.

We will continue to report monthly comparable sales with our next release scheduled for the week of May 28th. I should also note that our first quarter 10-Q was filed last night.

And with that, I'll turn it over to Dave.

Thank you, Carol, and good morning, everyone, and thanks for being with us this morning. I'm going to begin by providing some perspective on our sales results through the first four months of the year and I think all of us will probably agree that the difficult macro environment for casual dining has continued here into the first quarter and certainly with no help from mother nature. According to [Naptrack,] Q1 2007 comparable restaurant sales for casual dining were down 1.9% with traffic down 4.0% and the results for the bar and grill space were even weaker. The good news is that during March, Applebee's traffic performance in Company restaurants, which has been a good surrogate for the system, outpaced not only bar and grill -- the bar and grill segment average but casual dining as a whole. And that was aided significantly by our new Pick 'N Pair lunch program and I'm going to talk about that here in a second. And although we can't comment on industry results in April, we're pleased with the sequential improvement we saw during the month while acknowledging that this was against an easier comparison.

We also continue to see improvements in markets such as New England and Michigan, which is good news. Of concern however, as many others in the industry have noted, trends in California this year have been very soft.

Now with that environment as our backdrop, we continue our focus on improving the things that are within our control. Our key strategic initiatives for the year remain very much the same as they have been -- the continuous improvement of our food, the evolution of our advertising, and a greater emphasis on communicating our value proposition to our guests.

Now if I can, allow me to make a couple of points on those three initiatives. One of our strategies this year has been a reduction in the number of promotional campaigns we run and we've done this in order to improve our operational execution as well as to leverage the improvements we've made to our food. We started off the year with our popular three-course combos which ran through March 18th and then began our current Steak & Angus promotion which runs through Memorial Day.

Now in addition, we launched our Pick 'N Pair lunch problem in late February and it was backed by four weeks of media spending with a nationally televised price point in early March. We've been pleased with our traffic improvement since the launch of the program. And it's important to note, this is not a promotion, but it's a compelling feature of the brand just like Carside and Weight Watchers, which you can expect to see us continue to message to our guests going forward. The Pick 'N Pair program clearly communicates a strong value proposition as well as customization. The combination of attractive price point, value, quality, speed and customer choice has been a home run with our lunch guests. This program is offered Monday through Friday and it's resulted in substantial improvements in lunch traffic and interestingly enough with a nice residual benefit to Carside sales as well.

In addition to lunch, both late night and bar sales continue to trend positively. These shoulders of our business have been driving our overall sequential improvement. The big challenge remains improving our dinner traffic, the body of our business, particularly on the weekend.

Now, I'm optimistic our upcoming food campaign supported by the evolution of our advertising message is going to draw the guests back in to our restaurants. In that regard, as I noted on the call in February, George Williams joined our team as Chief Marketing Officer and he has quickly made an impact by translating our brand positioning into a very clear, well-articulated menu strategy. This strategy will include our continued relationship with Tyler Florence whose bruschetta burger is featured in our current Steak & Angus commercials. George and his team are also conducting an agency review with the goal of having a new partner in place in the next four to six weeks.

I'd like to take a moment to congratulate our entire operations team for executing well in this environment. They not only effectively controlled costs during the quarter but have achieved substantially higher guest satisfaction scores as of late, and our management and hourly turnover rates continue to be substantially lower than the industry, and I want this moment to thank all of our associates for their hard work in achieving these results.

To close my comments, with the settlement of the proxy contest last week, I'm optimistic that our focus on the business will lead to continued improvements in our fundamentals. We're beginning to gain traction with our strategies, although we're still not where we want to be. The team is focused and charged as we believe we now see the other side of this down cycle.

With that, Steve, I'll give it to you.

Yes, Dave, thanks. Good morning, everybody. Let's talk about the quarter. Before I get into some of the results on the P&L, I think right up front I want to try to clarify any confusion there might have been around the accounting treatment of these store closures. Now as you know, in March, we announced the decision to close 24 restaurants and we actually closed 19 of those in the first quarter. Now because of the gap -- the accounting we've got to do here, we're required to report both the impairment charges and the results of operations for 15 of these stores as discontinued operations, or as Carol likes to say "disco." I like that, discontinued operations. So the pretax charges for these 15 stores totaled $18.9 million. In addition, these 15 restaurants generated a pretax operating loss of $400,000 in 2007, which is also included in the discontinued operations line. These amounts are broken out in Footnote 5 of the Q and they're also shown in the non-GAAP reconciliation that was in our press release.

We've also reclassified first quarter 2006 operating results for these 15 stores which resulted in a decrease in previously reported sales of $5.6 million and cost of Company restaurants sales of $6 million. Because we believe that four of the closed restaurants will have significant sales transferred to other existing Applebee's, the results of operations for these stores, as well as the five that have not yet closed, remain in continuing operations. This line is called Impairment and Other Restaurant Closure Costs and that totals $6.6 million on the P&L and represents the pretax charges related to these nine stores.

So bottom line, total pretax impairment and other closure costs total $25.5 million, in line with our previous issued guidance, and the pretax operating loss for the 15 stores classified as disco total $400,000 for a total EPS impact of approximately $0.22 per share. Now if you've got any additional comments on that, Carol is much more qualified to talk about that than I am.

Now, as for the rest of the P&L, Company sales -- Company sales decreased 0.7% to $300 million as a result of a reported 6.7% decline in average weekly sales offset by a net capacity increase of approximately 6%. On the surface, it looks like the gap between Company and comps widened during the quarter, but as we noted on our year end call, this is distorted as a result of the 53rd week of performance last year. This extra week between Christmas and New Year's has a very high average unit volumes so when you compare like weeks here, A was really declined by 5.5% versus a comp decline of 4.5% and that's a slight improvement in our trend versus what we saw for the last several quarters.

Franchise royalties and fees were up 3.1% to $37.1 million. That's driven by a net capacity increase of approximately 7% as 101 franchise restaurants opened in the last 12 months, partially offset by a reported 5.1% decline in average weekly sales. Taking the same logic that on the 53rd week comparing these like weeks, domestic franchise A was declined by 4.2% versus a comp decline of 3.9% during the quarter.

System-wide sales increased 0.8% for the quarter and that's net capacity up of 6.5% and 134 new restaurants opened in the last 12 months. Capacity growth was partially offset by a reported decline in domestic A was up 5.6 %for the quarter and again, comparing these like weeks domestic A was declined by 4.5% versus a comp decline of 4%. Net income was $9.5 million versus $27.2 million in the prior year quarter. Excluding disco impairment and other closure costs and expenses related to the strategic alternatives process, net income was $27.1 million versus $28.5 million last year.

Reported EPS $0.13 versus $0.36. Again, excluding all that, the disco, the impairment closure and strat alternatives money, the diluted EPS was $0.36 this year versus $0.38 last year. Again, you've got a reconciliation of all this in the press release.

Excuse me. Let's hit a couple things on the cost side of the P&L. Restaurant margin before pre-opening came in at 13% for the quarter. That was a 220 basis point decline from prior year. Food costs came in at 26.5. That improved 20 basis points and that was really no help from a commodities perspective but really helped by a menu price increase of 1.4% taken in January. We've got total effective menu pricing here in the quarter in our numbers of 2.8%.

Although there's been a lot of commentary regarding rising commodity costs, our major proteins are contracted for the full year. We continue to expect net commodity costs to increase by approximately 1% in 2007 for us.

Labor -- overall, labor came in at 33.9. That was up 120 basis points. Hourly labor was the biggest mover there, up 80, with wage rates up 3.2%, and higher than recent quarters as we saw the impact of state minimum wage increases go into effect in a pretty significant way here in the quarter. We're going to keep our eye on that.

Management labor was up about 40 basis points and that reflected an increase in pay rates which was partially offset by lower store level bonuses here in the quarter.

(Sneeze) Sorry. DNO. DNO overall was at 26.6. That's up about 120 basis points with the largest variance attributable to depreciation that was 70 BPs and rent about 30. And again, those two lines due primarily to deleveraging of lower sales volumes.

Utilities were unfavorable by 20. Starting to see a little bit of a moderation there as we lap some big utility increases taken last year.

Advertising was flat. G&A came in at 9.7 for the quarter. That was down 80 basis points due to a number of factors but primarily lower stock based comp which was offset again by these expenses related to the exploration of strategic alternatives.

Stock based comp was lower due to a number of factors including higher costs in last year's first quarter as a result of our vesting rules and the granting of performance based equity at 2007 as we disclosed in Note 2 of the recent Q.

Tax rate came in at 34.4%, slightly lower than the 35% rate most of you were modeling due to higher employment tax credits.

Now before we close, a couple quick looks at the balance sheet. Liquid assets, which would be cash and short-term investments, were nearly $16 million at the end of the quarter. Debt outstanding was $155 million. We paid some -- about $20 million in debt down here in the quarter. Book debt to cap came in at 23.7.

Actual shares outstanding were 74.6 million. During the quarter, we bought back about 42,000 shares at an average price of $23.93 for about $1million. This was the final purchases on a 10B51 we entered into prior to entering into our strategic alternatives. We still have $239 million remaining under our authorization. I think this is a no-brainer. I think everybody understands this, but I'll say it. Given where we are in the strategic alternatives process, the Company is currently precluded from buying back stock until we get through that.

So hopefully, that recaps a lot of your questions around our results. The 10-Q will answer other questions. If you've got anything additionally, please contact Carol. She'll be available today.

With that Operator, we're going to close it. We thank you all and thank you for your continued support of the Company. Bye bye.

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