Dine Brands Global Inc (DIN) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Applebee's International second 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.

And I would like to introduce your host for today's conference, Ms. Carol DiRaimo, Vice President of Investor Relations. Ms. DiRaimo, you may begin.

Thanks, Matt. Good morning and thank you for joining the Applebee's second quarter 2007 conference call. This call is being broadcast instantaneously 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, on July 16th, IHOP and Applebee's jointly announced the definitive agreement under which IHOP will acquire Applebee's for $25.50 per share in cash, representing a total transaction value of approximately $2.1 billion. The all cash transaction, which is expected to close in the fourth quarter 2007, is subject to the approval of Applebee's shareholders, customary closing conditions and regulatory approval. In connection with the proposed transaction, IHOP and Applebee's will be filing documents with the Securities and Exchange Commission and Applebee's will file a related proxy statement. Investors and security holders are urged to read the proxy materials when they become available because they will provide important information about the proposed transaction.

In response to many of your questions, I cannot provide a date for when the proxy statement will be available. Investors and security holders may obtain free copies of these documents when they are available and other documents filed with the SEC at the SEC's website at www.sec.gov. In addition, investors and security holders may obtain free copies of the documents filed with the SEC by IHOP, by contacting IHOP Investor Relations at 818-240-6055. Investors and security holders may obtain free copies of the documents filed with the SEC by Applebee's by contacting our Investor Relations department at 913-967-4000. In addition, you may also find information about the merger transaction at www.ihopapplebeesacquisition.com.

Applebee's and their directors and executive officers may be deemed participants in the solicitation of proxies from the stockholders of Applebee's in connection with the proposed transaction. Information regarding the special interests of these directors and executive officers in the proposed transaction will be included in the proxy statement of Applebee's described above. Additional information regarding the directors and executive officers of Applebee's is also included in Applebee's proxy statements for our 2007 annual meeting of stockholders, which was filed with the SEC on April 9, 2007, and the supplemental proxy statement filed on May 1, 2007. These documents are available for free of charge at the SEC's website at www.sec.gov, and from investor relations at IHOP and Applebee's as described above.

Our agenda for today is similar to the last quarter's, given the circumstances. I'll turn it over to Dave in a second for some brief comments and then to Steve to drill down into the second quarter numbers. As I'm sure most of you understand and expect, we will not be holding a Q&A session this morning, as we would be unable to respond to any questions about the pending acquisition. We will continue to report monthly comparable sales, with our August sales release scheduled for September 4th, after the close. I should also note that our second quarter 10-Q was filed last night with the SEC.

Many of the statements we are about to make are forward-looking and based on current expectations. There are several risks and uncertainties that could cause actual results to different materially from those described. These risks include, but are not limited to; our pending merger with IHOP, our ability and the ability of our franchisees to open and operate additional restaurants profitably and generate positive operating cash flows and return on invested capital, the impact of economic and demographic factors on consumer spending, maintaining and growing the value of the Applebee's brand, the impact of intense competition in the casual dining segment of the restaurant industry, the impact of future leverage on our operations, the failure to open the restaurants anticipated, the impact of increases in capital expenditure costs on future developments, our ability to attract and retain qualified franchisees, and the impact of further penetration of restaurants in existing markets. For a more detailed discussion of the principal factors that could call actual result to be materially different, you should read our risk factors in Item 1A of our 2006 annual report on Form 10-K. We disclaim any obligation to update forward-looking statements.

With that, I'll turn it over to Dave.

Thank you, Carol. And good morning, everyone. I'll begin today by providing a brief update on where we are in the transition process with IHOP. Our management team has been working with the IHOP management team to facilitate the integration of the two companies. We were pleased to announce to our associates in the community the quick decision to go forward with our previously planned move to our new support center in Lenexa, Kansas, beginning in December of this year. And we expect both brands to operate dedicated support centers in Kansas and in California for the foreseeable future.

The most critical piece of this integration involves people. As we disclosed yesterday, the transition team finalized the details with some of the most important questions that our people had regarding retention and severance. The resolution of these issues was vital, as both companies recognize the importance of continuity throughout the closing process and obviously beyond. We now begin building the integration plan and the business strategy that will set up the combined Company for future success. The Applebee's and IHOP transition team will be working with an independent consultant that's been engaged by IHOP, The Parthenon Group, that specializes in restaurant mergers. Parthenon and the transition team will insure the integration is efficient and that it's subjective. This work is expected to take until November. I'd like to thank all of our associates as well as our franchisees for their continued focus here on delivering results during this transition period.

Now, with that being said, let me turn the focus of my remarks back to the business for a moment. Despite the difficult macro environment, the Applebee's team has remained committed to improving the things that are within our control. Our three key strategic initiatives for this year have not changed; the continuous improvement of our food, the evolution of our advertising, and the greater emphasis on communicating our value proposition to our guests. Let me make a few points on these initiatives, if I might.

After conducting an extensive agency review, George Williams, our Chief Marketing Officer, in collaboration with with our Franchise Marketing Council, recently selected McCann Erickson of New York as our new creative agency of record. McCann Erickson is internationally known for its award-winning creative work on iconic campaigns that include MasterCard's Priceless, Staple's Easy Button, and Verizon's, The Network and -- among others. And they are clearly the industry leaders in advertising effectiveness. Their first priority is to develop a new integrated communications campaign that will launch in the fourth quarter of this year. We're thrilled to have McCann Erickson on board to create fresh and compelling advertising. We believe the concept that they have presented to us fits perfectly with our brand strategy and brand positioning. It's intended to breakthrough the category clutter in a significant way and to drive traffic to our restaurants. In the meantime, we will launch a value-driven promotion on August 13th. It's important to note that this promotion was created by our interim agency, having done some very nice work for us, but does not reflect our new creative direction.

I'm also happy to let you know we recently extended our relationship with Tyler Florence. And that's been extended through June of 2008. This contract gives us exclusivity with Tyler in the casual dining, fast casual, family and QSR segments. In having locked on our brand positioning, we have provided even clearer direction to Tyler that is centered primarily on bar and grill classics. We are currently in the last two weeks of our Grilling Fresh with Tyler Florence campaign, and are encouraged that we are continuing to experience the most significant long-term gains guest satisfaction scores on our food-related measures.

A part of our brand evolution, we are very pleased with the early results of our new prototype and remodel designs, which represent a culmination of nearly two years of collaboration with our franchisees and our partners at the design forum. In addition to our remodel in Springfield, Missouri that has been completed for several months, last week we reopened a restaurant in the St. Louis area, 11 months after the previous building was destroyed by fire. The restaurant opened with an updated exterior image as well as new interior design elements that featured comfortable, casual seating in the bar area; walls, carpet and fabric in updated colors; and our signature community artifacts, positioned for higher impact in specific areas rather than scattered throughout the restaurant. Many of our franchisees have visited these locations and are excited about the updated look. During my visit last week to St. Louis, I was extremely encouraged by the reaction from both our guests as well as our associates.

Lastly, I'll give a little perspective on our sales results through the first seven months of the year. I think all of us would agree that the difficult macro environment for casual dining continued here into the second quarter. And as many others in the industry have noted, trends in California and Florida this year have been particularly soft, and perhaps that's driven by the housing market. The good news is that our performance has remained relatively stable under the circumstances, with Texas and now New England our best performing Company markets. And we've been very pleased with the results of our Pick 'N Pair Lunch Menu, which generated positive lunch traffic in Company restaurants when it was advertised during the month of May.

Finally, to close my comments, I would again like to sincerely thank all of our associates and our franchisees for their continued dedication and their performance in the face of many distractions.

With that, Steve, I'll turn it over to you.

Great, Dave, thanks. Good morning, everybody. Before I dive in the P&L, I want to try to provide some clarity on any confusion there might be over the treatment of our store closings and the financials, so bear with me. As you know in March, we announced the decision to close 24 restaurants, of which 19 closed in the first quarter and four closed this quarter. Because of the accounting rules, we are required to report both the impairment charges and results of operations for 19 of these stores as discontinued operations. The pre-tax charges for these 19 stores during the quarter totaled $1.5 million. In addition, these 19 restaurants generated a pre-tax operating loss of $100,000 in the quarter, which is also included in the discontinued operations line. Partially offsetting these amounts was the gain on the sale of a closed restaurant of $700,000. These amounts are broken out in footnote five of the Q and are also shown in the non-GAAP reconciliation that's in the press release.

We've also reclassified a second quarter 2006 operating results for these 19 stores, which resulted in a decrease in previously reported sales of $6.9 million and a cost of Company restaurant sales of $7.6 million. As only 15 of these stores were classified as discontinued operations in Q1, we've made conforming changes to prior periods so that the year-to-date numbers for both '07 and '06 reflect the 19 stores as discontinued. So you're not -- so you won't be able to add the previously reported Q1 and Q2 results together to get the year-to-date number for certain line items.

Because we believe that [four closed] restaurants will have significant sales transfer to other restaurants, the results of operations for these stores remain in continuing operations. The line called impairment and other restaurant closure costs totaling $69,000 on the P&L represents the pre-tax charges related to these four stores.

So bottom line; total pre-tax impairment and other closure costs totaled $939,000 for the quarter. In addition, pre-tax costs relating to the exploration of strategic alternatives and the proxy contest were $2.4 million. After-tax charges related to the closed restaurants and the strategic alternatives and proxy contest expenses totaled $2.1 million, or approximately $0.03 a share. Thanks for all that.

Now, let's talk about the P&L. First of all, Company sales increased 2.2%, to $296 million, that's capacity growth excluding the closed stores of -- up about 4%. Average weekly sales, again excluding the closed stores, declined by 1.9% versus a comp decline of 1.2% during the quarter. That was a slight improvement in these trends that we've seen.

Franchise royalties and fees were up 5.6% to $36.2 million, driven by net capacity increase -- excuse me -- of nearly 7%, as 91 franchise restaurants opened in the last 12 months. Importantly, nearly 30% of the franchise openings year-to-date have been international locations. The capacity increase was partially offset by a reported 1.8% decline in domestic average weekly sales, including a domestic comp decline of eight-tenths of a percent during the quarter.

Systemwide sales increased 3.4% for the quarter, and that's capacity growth of 5%, with 117 new restaurants opened in the last 12 months. Capacity growth was partially offset by reported decline in domestic [AWUS] of 1.4% for the quarter.

Net income came in at 24.2% this quarter versus 20.4% last year. Excluding discontinued operations, impairments, other closure costs, and expenses related to the strategic alternatives and proxy contest, net income was 26.2% versus 22.8% last year. Reported EPS came in at $0.31 versus $0.27. Again, excluding the discontinued operations, impairment, closure costs, strategic alternatives, and proxy contests, diluted EPS was $0.35 this year versus $0.30 last year. Again, the reconciliation of all these non-GAAP measures and earnings are in the press release.

Now, to hit a couple things on the restaurant side in the P&L. Restaurant operating margin before pre-opening came in at 11.5, that's a decrease of 155 basis points. And again, this has also been restated for the discontinued operations. We look at the pieces; food costs came in at 26.7, that was an increase of 20 basis points over the prior year, due in part to higher food costs related to promotions during the quarter. Consistent with what we're seeing in the industry, we also had some higher dairy costs. Commodity cost inflation is mostly offset by a menu price increase of 2.6% we took in the quarter, bringing the effective menu price increase this year to 2.7%. We continue to expect net commodity costs to increase approximately 1% in '07, as the majority of our proteins are contracted for the full year.

Labor came in at 34.5, that's up 85 basis points. Hourly labor was up 25 points, with wage rates up 4.4%. And again, that's state minimum wage increases that we've talked about previously. Management labor was up 75 bips, and that's reflecting a 4.9% increase in pay rates and higher bonuses, as the field is doing a better job on bonus this year versus last year. Payroll related costs decreased by 15 basis points, as we see favorability in our insurance -- group insurance expense.

Now -- D&O was up about 50 basis points. The largest unfavorable variance there was attributable to depreciation and rent as we experience a delevering effect of lower sales volume in Company restaurants. Again, this was partially offset by lower local advertising.

G&A came in at 9.7 for the quarter. That was down 30 basis points, as we had lower stock-based comp and an increase in the return on the investments in the Rabbi Trust deferred comp plan, which is offset in the investment income line. These decreases were partially offset by expenses relating to the exploration of strategic alternatives and the proxy contest, which totaled $2.4 million in the quarter. Tax rate came in at 31.4%, as we benefited from a -- higher tax credits related to the construction of our new corporate headquarters.

Now in closing, a couple looks here at the balance -- a couple of things on the balance sheet; liquid assets came in at $8 million, debt outstanding was at $144.7 million, book debt-to-cap came in at 21.4, actual shares outstanding in the quarter, 74.9. And I think as you all know, because of strategic alternatives, we have not been buying back any stock. And as a result of the pending acquisition by IHOP, the Company is also precluded, again, from having any open-market or planned share repurchases.

Hopefully, that recap as well as our 10-Q will answer most of your questions. If you have any additional questions, please give Carol a call. With that, we'll close out our conference call. And again, thanks to all for your continued interest in the Company. Bye, bye.

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