Dine Brands Global Inc (DIN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2007 IHOP investor conference call. My name is Akia and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you. As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Ms. Stacy Roughan. Please proceed, ma'am.

Good morning. And thank you for participating in IHOP's third quarter 2007 conference call. Today with us from management are Julia Stewart, chairman and CEO, and Tom Conforti, CFO. Before I turn the call over to Julie 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 would like to turn the call over to Julia Stewart.

Thanks, Stacy and good morning, everyone. I'm sure all of you have had the opportunity to review this morning's news release. We are eager to provide some context and discuss the one-time acquisition-related factors that impacted our profitability for the quarter. So let's get started. Now, as you know, on July 16, IHOP Corp. announced a definitive agreement to acquire Applebee's International Inc. for $25.50 per share in cash, representing a total deal value currently estimated at $2.1 billion. And at that time, we disclosed that we had entered into an interest rate swap agreement which was intended to hedge IHOP's exposure to interest rate fluctuations on the securitized debt we planned to use to fund the acquisition of Applebee's.

As a result of that agreement, we were able to secure a fixed base rate of 5.694% for the asset-backed notes expected to be issued under a whole business securitization to finance the acquisition. Because this swap agreement was put into place during the third quarter, accounting rules require that we measure and quantify the gap between the swap rate of 5.694% and the market swap rate as of quarter's end. Based on a decline in interest rates between July 16th and September 30th, this difference amounted to $70.3 million. $35.6 million of this liability was required to be recorded as marketed to market noncash charge on our P&L during the third quarter 2007. In line with the accounting treatment required for derivative instruments and -- hedging activity, the residual amount $34.7 million would qualify for hedge accounting treatment and be recognized as interest expense amortized over the five-year expected term of the securitized debt. Again, this is an only an accounting treatment at this point in time and the final financial impact will be known when the hedge settles at the close of the securitization.

Now while Tom will walk you through the mechanics of this treatment in more detail and what it means longer term in a moment, let's review its impact on its earnings performance for the quarter and the year. EPS declined to a loss of $0.69 for the quarter and declined to a profit of $0.80 for the first nine months of 2007, versus the same period last year.

Now, excluding the hedge accounting impact, EPS for the third quarter 2007 would have been $0.60, down two pennies compared with the same quarter last year. And for the first nine months of 2007, excluding the hedge accounting impact, and debt repayment costs associated with our March 2007 securitization, EPS would have increased 14.5% to $2.13. This increase was primarily due to a 7.2% increase in the profitability of our core franchise business, a 10.1% decrease in the company's effective tax rate, and a 5.6% reduction in diluted weighted-average shares outstanding. Now, with that explanation aside, we're very pleased with the performance of our core IHOP business for the third quarter 2007, as it demonstrates our proven financial formula for success driven by a highly franchised, low CapEx, high cash flow-generating business model. Our core franchising business turned in solid results for the third quarter 2007, as we continue to focus on our key strategies. Energizing the brand, improving operations, and maximizing development. We were pleased with our same store sales performance of 2% during the quarter, which led us to our 19th consecutive quarter of growth. We believe this is especially positive considering the difficult economic environment and increase competition particularly at the breakfast day part. We are optimistic about the balance of 2007 as we expect to benefit from national media buys in the last two months of the year, versus local advertising in the same period in 2006.

Next week, we will introduce a new limited time offer, pancakes surrender, which will present guests with a choice of pumpkin, carrot cake, or New York cheese cake pancakes. It is a unique and appealing promotion that we believe will motivate guests to visit IHOP more often.

And finally, in the fourth quarter, we have a planned system-wide menu update and expect to see continued momentum around gift card sales and our carry-out program, IHOP and go. We are also working to raise the bar throughout the IHOP system from an operations perspective. To communicate these key operations initiatives, we annually hold our national franchise conference. At this year's NSC, there were nearly 1,000 franchisees, employees, and vendor partners who came together in Puerto Rico in September. At the NSFC, we stressed the importance of breaking away from our competition in family dining, and differentiating and improving IHOP's guest's experience by making our service as good as our pancakes, enhancing the price/value relationship and looking at ways to become increasingly competitive with Key West Star as they focus on the breakfast day part. At the same time, we provided in depth breakout sessions designed to educate and provide tools to franchisees to manage and improve restaurant profitability, given the increasing cost pressures. It was a terrific event that had our franchisees energized and our 1300-plus restaurant system aligned and ready for another strong year in 2008. Turning to franchise development, franchisees opened 14 new IHOP restaurants domestically during the quarter. Year to date, franchisees opened a total of 37 new IHOP restaurants And during the quarter, we also added 18 new IHOP franchise restaurants to our development pipeline.

In addition, we have pending commitments for another 59 IHOP restaurants to be built by franchisees. This activity brings our current development pipeline to as many as 456 IHOP restaurants, signed, optioned or pending, as of the end of third quarter. We remain dedicated to expanding the reach of the IHOP brand and improving the operational performance of our franchise system. And we remain optimistic about the continued solid performance of our core business for the balance of the year. Now, before I turn the call over to Tom, let me provide you with a quick update on our progress to complete the acquisition of Applebee's. The definitive proxy statement was filed at the end of September, and we are now a week away from Applebee's shareholder votes, regarding the acquisition which is scheduled for Tuesday, October 30th. With an affirmative vote by Applebee's shareholders, we remain on track to close the acquisition during the fourth quarter, most likely sometime the week after Thanksgiving. We're moving ahead as planned with the securitization financing, with the goal of closing directly into that facility. Tom will also provide you more detail on our financing efforts in a moment. The integration process is in its final stages and we are hopeful of providing visibility to the leadership structure for the combined company as well as the Applebee's and IHOP brands in the coming weeks. We built an instate organization based on our intention to franchise all but one Applebee's company operated market. Based on the time we've spent with Applebee's planning the integration, we are still confident that the steady state cost reduction targets and our base plan of $50 million will be met. We continue to work aggressively to arrange for the sail leaseback of company-owned real estate or approximately 200 Applebee's locations. We still remain confident of completing the sale leaseback effort some time in 2008. And on the franchising front, we have formed a dedicated team to ensure a timely completion of the sale of company units at the highest valuation possible. That team has developed a plan and begun outreach within and outside the Applebee's system for potential buyers of company market. We are optimistic that we will be able to complete the sale of the units, consistent with our original timetable by 2010. With that, I would now like to turn the call over to Tom Conforti, our chief financial officer, for more detailed discussion of our financial performance for the third quarter of 2007.

Thanks, Julia. And good morning, everyone. I would like to first start with an update on our acquisition financing. Move to a full explanation of the interest rate hedge impact we experienced during the quarter, and then wrap up with a quick review of IHOP's business performance for the quarter and year to date.

So first, we continue to move ahead as planned with the necessary steps to complete a whole business securitization of Applebee's, as well as the additional series of debt we expect to raise from the existing IHOP securitization structure. It is our intention to go to market with a combination of AAA-rated, Monoline insured notes and subordinated notes to fund substantially all $2.3 million -- $2.3 billion, of total acquisition costs, related to our purchase of Applebee's. The $2.3 billion financing breaks down into approximately $2 billion of debt, raised through the securitization of Applebee's, approximately $175 million raised through an additional series of debt from IHOP's existing securitization facility, as well as approximately $150 million of newly raised equity. We are on target with the legal and financial process efforts and would hope to fund the transaction directly through the securitization. As you are all aware, since the announcement of the acquisition of Applebee's, the credit markets have changed significantly over the past few months. And we have been keeping a watchful eye on the market dynamics that could potentially increase the difficulty of successfully placing our securitized notes. Specifically, within the Monoline insured, asset-backed securities market, conditions have become somewhat more challenging due to a decrease in the number of investors participating in this market, and an unprecedented widening of risk spreads. That said, we believe we can still fund the transaction through the securitization in late November.

As a reminder, in the event that we are not able to fund through the securitization, we have obtained bridge facility commitments from Lehman Brothers to provide approximately $2.1 billion through a bridge loan to fund the transaction, pending the completion of both securitizations. If we have to utilize the bridge financing, it would be our intention to replace the bridge as soon as possible. Lehman remains fully committed to providing us this financing vehicle in the event it is needed.

Now, I would like to take a few seconds to explain the components of the ultimate interest rate on the securitized debt. There really are three components of the effective interest rate of debt raised through the securitization structures. You have the base rate, that's the five-year swap, which in our case is hedged at 5.694%. This effectively sets the ceiling for the base rate. Then, there is the fixed premium you pay the Monoline Insurance Company that wraps the deal, insuring payment of the interest and ultimate payment of the principal to the note holders. The final cost component that must be factored into securitized notes is a market spread for risk. This component remains uncertain, as market conditions are in flux. So two out of three components are capped. With the ultimate risk spread being determined when we finish our marketing efforts.

Now, for a brief explanation on the interest rate hedge, we put the hedge in place as a condition of the term sheet we negotiated once our bid for Applebee's was accepted. Since the time the hedge was put in place, the five-year swap rate, the base rate, has fallen from 5.694% to 4.888% as of the end of the third quarter 2007. This change translates into a $70.3 million impact in total, as of September 30, 2007, which is now reflected on our balance sheet at fair value. Accounting standards established further criteria, as to the effectiveness of the hedging relationships and call for a portion, or the ineffective portion of the hedge, to be recorded in earnings in the current period. In our case, the ineffective portion is equivalent to the percentage of the debt we expect to take down with asset sales prior to maturity. The ineffective portion of our interest rate hedge was $35.6 million, as Julia mentioned, for the quarter, and was recognized mark-to-market as a noncash expense on our P&L. The remaining $34.7 million would be deferred, and amortized to interest expense over the five-year debt period, after issuance of the securitized notes. It should be pointed out here that the hedge remains in place until the securitization is funded, and is settled at that point. Sometimes we expect the fourth quarter of 2007. If the market swap rate stays below our hedged rate, at the close of the securitization, we will be required to pay the counter party, Lehman, in this case, the difference. Conversely, if the market swap rate exceeds 5.694%, Lehman would be required to pay us the difference.

Now, let me remind that you if rates stay below our fixed rate swap level, we would be able to take advantage of lower interest rates during the term of the debt, there by reducing the net present value of the upfront costs associated with the swap transaction at the time of the close.

Again, we are working toward the goal of completing the securitization in November so that we can utilize those funds to CLOSE the acquisition of Applebee's. Beginning shortly after the shareholder vote, our merger agreement calls for a marketing period of 15 consecutive business days to secure financing and placement -- and the placement of the equity portion of the deal at the time of close. Currently, we expect to close the financing on or before November 29, 2007. Now, turning to the performance of our core business, let me quickly walk you through the key drivers of our segment performance for the quarter, and 2007 year to date. Starting with franchise operations, our core business, revenue growth was driven by higher retail sales, as a result of growth in the number of effective units as well as growth in same store sales. Franchise operations expense grew in line with revenue and produced a 7.6% increase in franchise operations profit for the quarter, and 7.2% increase for the first nine months of the year. Turning to the rental operations segment, rental operations profit decreased 5.4% for the quarter and 0.2% for the first nine months of the year. Profit was down in the segment in line with our expectations, that this segment would continue to be flat to slightly down. Rental operations profit decreased in the third quarter primarily as a result of the declining deferral -- deferred rental income from the underlying sublease maturing approaching expiration. Our company operations launch remains flat versus the third quarter 2006. And our loss increase from 1.3 million to $1.8 million in the first nine months of 2007 versus the same period last year. The loss is largely due to lower levels of sales at recently opened locations in our Cincinnati market.

Now, at the end of the third quarter, we operated 11 IHOP restaurants, 10 of which were located in our dedicated R&D markets of Cincinnati. Turning to financing operations, profit in this segment decreased 43.6% for the third quarter and 16.7% for the first nine months of 2007, as we continued to exit old model sources of revenue. In addition, interest expense related to financing increased 18.7% to $7.1 million, due to the higher level of debt associated with our March 2007 securitization. Now, moving to G&A, expenses for the quarter grew 9.9% to $17.8 million. Primarily due to higher costs related to the company's performance share plan for our executive management team, in line with IHOP's stock price performance in the last quarter.

However, year to date, G&A modestly increased 3.3% to $48.1 million, versus prior year, as we continue to successfully manage to our overhead expenses, to a modest 3% to 5% growth level. Looking at our tax rate, our effective tax rate during the third quarter 2007 was 38%, which was consistent with the same quarter of the prior year. Now, however, the company's effective tax rate decreased 28.5% in the first nine months of 2007, which was lower due to a one-time reduction in certain tax contingency reserves recognized in the second quarter of 2007. We expect our full-year effective tax rate to be approximately 33%. Turning to cash flow, cash provided by operating activities decreased 14% to $46.3 million for the first nine months of the year. This decrease was primarily the result of lower tax payables, and other accrued liabilities. Our cash flow was augmented by $12 million during the first nine months of the year, from the systemic run-off of our franchise and equipment notes receivables. This brought total cash generated which is cash from operations plus the receivables runoff to $58.3 million. As of September 30, 2007, we have incurred acquisition and financing-related costs of $12.7 million, which are included in our other assets in our balance sheet. CapEx, totaled a modest $2.2 million for the first nine months of the year, consistent with our plan not to develop any company operated IHOP restaurants and our dedicated R&D market of Cincinnati this year. With that I will turn the call back to Julia.

Thanks, Tom. Before I opened the call to your questions I wanted to touch on our performance guidance for 2007. While we remain comfortable with our existing performance guidance for 2007, as it relates to IHOP's business, we suspended our fiscal 2007 EPS guidance last quarter, as previous guidance did not take into account the effect of the Applebee's acquisition on full-year results. However, the acquisition not withstanding, we reiterated key performance assumptions related to IHOP's business, which are detailed in today's news release. So we continue to manage to our full-year guidance and are confident of ending the year on a positive note. Achieving all of our key performance measures, unit growth of 61 to 66 units, same store sales of 2 to 4%, G&A management of the 65 to 67 million, CapEx in the 6 to 8 million range, and cash from operations, and the 60 to 65 million range. And on a personal note, I just wanted to say that I've been working very, very hard with both teams on the acquisition process, and it has gone very well with integration. We have been spending a great deal of time especially myself, personally, with the Applebee's franchisees, the Applebee's employees. The optimism of the combined company is just static and I could not be more pleased with everyone's effort. I am very excited about the future. So with that, I would like to open a call with any question you might have. Akia are you on the line?

Yes, ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Please press star one to begin. Please stand by for your first question. Your first question comes from the line of Michael Galo of CL King. Please proceed.

Good morning. Tom, did I hear you right, I'm not sure if I heard you right, did you say that you incurred 12.7 million of acquisition-related costs so far this year?

That's correct, Mike.

And how much of that did you incur in the third quarter?

I would say about 10 million of it, I think. So that around 10 million.

And how much of that went through the P&L?

Zero. It is all on the balance sheet. It all gets capitalized, you know, either as financing, costs, or M&A-related costs, so.

So, in terms of just on the acquisition-related side, there was an any cost that slows back what you in the P&L with all just the counter form in the balance sheet.

That's correct.

Okay. Second question I have is in the event that you have to use the bridge financing, which obviously you're not anticipating it, but assuming that you do, any sense for what the terms on that commitment are?

Yes, we do have a sense of the terms, but because of confidentiality agreement that we've signed, we're not able to disclose them at this point.

Okay. And then just I guess when I look at the core operations, at IHOP, one area that seems to be stubborn, has been the profitability of the company operations, which seemed like they've got an little bit better in the second quarter, and its profitability came down a little bit again in the first quarter. I mean I still think in -- in the third quarter, do you still think that is an area you can get to break-even over time? Or is it just in the current cost environment that that is just going to be more challenging? What's your sense on that?

Well, the good news is, on all of the key performance metrics for Cincinnati, they're doing incredibly well, whether it is cost of sales, labor, controllable, [inaudible] controls, run rate on -- everything has gone up significantly in real basis points. The big issue is just sales. I mean clearly, these guys have figured out how to run operations and do it well. I have the utmost confidence in our new leadership there in Bill Raddabau but the real issue is sales and we have had a tough time in the top line, and there is a tremendous amount of effort and team work going on into putting a plan together for fourth quarter this year, and all of 2008, which I interestingly enough saw yesterday, very pleased with the fact that they put a lot of sales effort, but we knew going in that ours would be more of a break-even over time proposition. However, having said that, if you were to go in the market today, many of the new programs for '08 and '09 are being tested there and so we are putting and continue to put a lot of what I call heavy lifting on the marketplace, and that's the reality. So it is a lot of hard work from their testing perspective. We knew going in that was always going to be our proposition. I'm a little disappointed in the sales piece, but I have every confidence over time we will get it if it just may take a while.

And Mike you might recall when Julie and I gave guidance this year we said we weren't going to open company stores because we really wanted to spend time this year focusing on improving operations and we have a good operator there and so, you know, it is is going to take time to turn that market but we're making all of the right decisions, and fixing it before we go and expand it.

And just so you know, the testing of major initiatives has gone very well there. And that testing has made us opportunistically do things for the entire system, whether it is gift cards, or to go, or to some of the new menu programs that we're launching. All of that, and the prototype, and the remodel, all came from Cincinnati, so I'm appreciative of all their work they're doing. I wish we were doing a little bit better on the top line, but we'll get there.

And your next question comes from the line of Steven Reese of J.P. Morgan. Please proceed.

Hi, thanks. I just wanted to ask you, Julia, about pricing and I think we have seen some above average price increases on the franchisees and I know you've been pretty vocal about wanting to moderate this level pricing going forward. I guess in a perfect world, what would be the ideal level of a pricing next year and what are you doing with your franchisees to make them comfortable with perhaps, you know, lower level its pricing.

We have talked a lot with them and we taught the art and the science of pricing. I give the franchisees a lot of compliments. They have really fallen in line for this year and the menu that I just described earlier in my prepared remarks that is coming out here in the next 30 to 60 days, on average, most franchisees probably took about a 2% price increase which is really what you're looking for, a small de minimus price increase, and I think next year, if all goes well, you will see that small increase as well. Part of it is how we maneuver through the menu, how many items we take off. How much easier we make it for the franchisees. That's our real focus, is making certain that we do everything we can to provide them tools and systems to leverage the middle of the P&L, but you know, still they are business people and need to take a price increase and I don't think anybody is suggesting they shouldn't take anything, but I think moderated price increases is really the focus we've given them, small, small minute increases and I think that's what you will see and I think one of the major opportunities that we're seeing is down the road. I think both sets of franchisees are very excited about the opportunistic look at supply chain management, which is a nice way of saying if you combine the two companies, and you could really manage the supply chain. There is opportunistically a lot of opportunity to take, you know, real price increase -- you know, modest price increases because you're geting so much cost advantage out of supply chain. So, I think everyone on both sides, IHOP and Applebee's, is very much looking forward to that possibility.

Okay. Thanks. And then as you've had time to kind of review the customer research at Applebee's, what do you see as the biggest opportunities there to stabilize and improve trends over the next year?

I think the research I've seen initially, and again, we will be doing more and I will be seeing more in the time to come, but at least initially, the really, really good news is people love the brand. People love Applebee's. People genuinely like it. They may be coming less often. They may have more choices. They may be on a tight budget. So opportunistically, for me in the future, it is all about making certain that we have strongly differentiated that brand so that you're giving people a reason to visit and visit more often.

Okay. And then finally, I just wanted to ask about the national advertising point. It seems like we had a shift from local international this year when and when did that start and do you expect that to continue in '08?

Are you talking about IHOP or Applebee's?

IHOP.

At IHOP, we have absolutely have gone to national advertising, we have been on it since the beginning of 2003. And this year, we have an opportunity to have one more campaign on national advertising. It will be our fifth campaign, if the one coming up next week and we are very bullish about that because that opportunitically says we're on network or national television this year, and we weren't at the same time last year. So, we absolutely are very confident that will bode well for us from a top line perspective and the promotion itself is just a great promotion. You have to see it to believe it but you will love the spot.

Okay. Great. Thank you.

Yes

And your next question comes from the line of Brian Elliot of Raymond James. Please proceed.

Good morning.

Hey, Brian.

Just wanted to make sure I understood your comments about the interest rate situation. I understand that the sensitivity of it, but the -- you said, Tom, that since I guess the sort of original deal was announced, you all had a conference call with us, and laid out your expectations on the financing side. If I heard you right today, I just clarify that the base rate since that time has fallen, you gave us numbers, it was a point or so, more than a point, but that spreads have widened. Is that -- did I hear that correctly?

You did hear it correctly. And we would like to think that the two offset each other but, you know, we can't be that precise.

Well actually, that was my next question, though. Since we locked in at this rounded 5.7% rate, do you get the benefit of that reduction that is occurred subsequent to?

That's correct.

You do get that benefit?

I do but I pay for it,right? We pay for it in terms, and if rates were to stay where they are now, we write them a $70 million check but we get the benefits of lower rates going forward.

Okay.

And so the net present value of that as you might imagine, so it is a $70-million issue at this point, right? But because we will get lower interest rates than we had working in our model, part of those lower interest rates will offset the upfront cost of the hedge settlement. So, it will be a negative net present value from when we valued the deal, but it won't be of the magnitude that you see when you see $70 million on a balance sheet.

Sure, sure. Okay.

Thank you.

Thank you.

Ladies and gentlemen, as a reminder, please press star one for questions. And your next question comes from the line of Mike Smith, Oppenheimer. Please proceed.

Good morning. I noticed that you have one company store that was not in the Cincinnati market. Where is that?

It is in Indianapolis.

Okay.

Feel free to go there.

I will.

We would appreciate it.

I will get a pumpkin pancakes.

You know what? You laugh, but that is a big seller.

How about the cheese cake pancakes?

They sound pretty good. Too bad I can't eat that stuff and maintain my girlish figure. Prior -- I think on the last conference call you indicated that you thought the Applebee's acquisition would be accretive to earnings and was it '08, time?

Yes. Mildly in '08.

Okay. Now, what kind of an interest rate assumption did you use to give us that guidance?

Yes, I think I said it before right? So, I'm trying to figure out whether I can even go there, Mike.

Well, it looks like to me that it is probably 7.5% is kind of your tipping point.

You know, I can't go there, but I think if you listen to Brian's question, we give you enough sort of clue as to where the base rate is gone, and you know, where market spreads end up is anybody's guess, and so, you know, I think that what we would say is that our expectations for rates are not materially different than we started the process. But you know, your interpretation of materiality may be different than mine.

Did you give us the rate associated with the insurance?

I don't think I did, no. There is a confidentiality agreement that prevents me from ever saying stuff like that.

Okay. Thanks.

And your next question comes from the line of Rachel Rothman of Merrill Lynch. Please proceed.

Hi, guys.

Good morning.

I dropped off somehow so sorry if I'm going to repeat somebody else's question. Can you talk a little bit about reading through the approxity [inaudible] Applebee's management team felt comfortable on a stand-alone basis reducing the G&A by 52 million while keeping. The management team in place and I believe actually paying themselves more? And I think that compares to your estimate of about 50 million without the duplicative management team. Can you talk about, where, which line item you think might have the most upside surprise when you actually look to cut G&A or maybe where their assumptions were different than yours?

You know, Rachel, I would say the $50 million that Julia commented on was an approximation. You know, we're very comfortable with that number and so there are differences when we went through the process with the management team. There were certain assumptions made in certain areas that we believe actually aren't -- it isn't in the best interest of the business for us to make those types of changes but, enough to be said that the overall level of expenses, the reductions that we're expecting in our end state will comfortably reach that $50 million number.

I think the one thing, if you think about it, there will be pluses and minuses on either side, clearly they assumed they staying a publicly held company and all of the expenses that went with that. Obviously, we took those out and some of that was a trade off between department and I think that is a really good example but there will be more. I think as time goes on, Rachel will be in a really good position to share with you a lot more details in terms of where we are cutting and why, both not just from selling company units, but other opportunities as well, so I look forward to you asking me that question again probably -- I would say in the next six months or so, we will be in a very good position to give you a lot of insight and detail that you probably right now at this point, it is more global, but that is the one good example I can think of is them staying a publicly-held company, us pulling those dollars out. Conversely, we saw some opportunities they didn't, so I just think in the coming months you will be pleased with not only the level of detail, but you know, I think that I look at that 50-plus million as sort of a minimum.

Agreed.

Perfect. And then Tom, on the tax structure standpoint, do you have an update on how much of the goodwill you will be able to --

You know what? We're going through that process now. We have engaged someone on valuation of purchase price accounting, and we're going to have preliminary estimates for the offering materials and for the pro forma that we put together with the offering materials, so Rachel, you know, I won't have that now. We won't have it finalized probably until probably until the end of December.

Okay.

But you know, we are working actively on it, and we will share that as soon as we can get to it.

Do you think that is about the same time that we would get pro formas for the combined company?

We are going to guide on 2008, we're going to guide in February, probably mid February sometime. We're going to do it concurrently with our close of the fourth quarter.

And will we have historical pro formas prior to that?

We are going to file an 8-K, I think, aren't we?

Yes.

We are filing an 8-K. So there will be some historical consolidated pro formas.

Perfect. And then I know there have been a couple of questions on the interest rate swap.

Yes.

Can you just talk philosophically, I guess, to your point, it is a negative net present value to you guys to pay the 70 million up front, for the cost of the swap, do I understand correctly that if you don't fund into the securitization and fund into the bridge instead and stay on the bridge that you actually don't need to pay the 70 million?

Thanks for pointing that out, Rachel. It is a contingent swap. And so the contingent swap says if we don't close into the securitization within a year from initiating that swap, so that would take us to July 2008, around middle of July 2008, then that hedge exposure goes away. But then we will be in a bridge, and, you know, so there may be some added costs to the bridge over securitization, so.

But she is right. You wouldn't be paying --

We would not, that's correct. And so it is either -- it goes away, the earlier of, you know, the one-year anniversary or if we decide we can't close into a securitization, which is unlikely.

So there is some potential that if you don't use the securitization, that you can go onto the bridge and go with unsecured debt without paying the 70 million sometime in the beginning of '08?

Rachel could you repeat that question?

So, if you were on the bridge, for example, there may be some opportunity to float corporate debt in the beginning of '08 and the first half of '08 and not pay the $70 million?

That's correct, that's correct and the cut-off is July.

Okay. Perfect.

And that debt would be only the -- the only debt available to be us would be the bridge that [cut].

Initially, yes.

Yes, correct.

Fair. And then just in terms of the pricing and I this is a follow-up why and this may have been when I got dropped off and I apologize, but, and I know you guys have really been focused, I think it is now three franchise conventions in a row on helping the franchisees understand price elasticity of demand and not to take price to an immediate reaction and to kind of wage and monitor pressures. Do you feel like the amount of price that has been taken still leaves the franchisees wiggle room in terms of their pricing power or if it is going to be a situation like we have seen with the few other chains where the following year they leave themselves without a meaningful driver seems to fail [inaudible] if traffic doesn't rebound?

Well, it is a great question. And I think short term we seemed, I don't know if you heard this, one of my answers was for the fall menu, which comes up in the next 30, 60 days, that is a new menu with some new items and some improved items, and the average franchisee is taking between two and 2.5% of price increase.

Okay.

But I think there are two things going on here. When we do those product promotions, six times a year, they price those product promotions very, very aggressively. So you're getting consumers in, there is a great price point for that. And franchisees have really gotten aggressive in those price points on those product promotions, which is a great thing. So they have all sort of bandied together in their marketplaces and said look, it is really important to us that we have aggressive pricing. That I've seen really take on, in a big way. Especially for this fourth quarter, and for next year. Which is one of the reasons, you know, I am still confident about the fourth quarter is because they have gotten very aggressive in pricing on their promotion. As it relates to the menu, have you two ways and we teach this a lot, and this is -- I've been doing this for year, there are two ways to get pricing, and one is off existing items, where you take a nickel or a dime, or a penny, and the other is in what I call effective price increase which is brand new items that have never been on the menu before, and you have an opportunity to price both effectively and do it in a mainstream way, so we're going to see effective price increase, as well as small price increases, on items where they think they can get it, or there is a new improved product, but by and large, I would tell you I think they've gotten religion, it is probably the best way to say it and they have gotten very smart about that price increase, both the art and science of it. And I do think there is some movement. It depends 0 in what area of the -- it depends in what area of the country and in what category but I think there is still some -- there is is a little bit of opportunity, it is sort of dependents on where -- depends on -- I, in general, see there may be differences in the midwest versus the coast. That is no different for Applebee's or frankly any other chain, in terms opportunistically where you are, I think the coast has been very aggressive in their price increases and they recognize that. I think the midwest probably has some opportunity. And so I think in general, people just have gotten very smart, but the greatest opportunity I can tell you is that they really got smart about that aggressive price point on those product promotions. And that's absolutely in everyone's best interest.

Great. And then finally, on the traffic, do you feel like traffic is negative because you're losing traffic to fast food or people are eating at home more or is it some other -- are people shifting out, or are they just not eating out or where do you think the customers are going?

You know, I don't have the definitive answer, but I should -- if you asked me that question by early 2008, we would have a lot of the tracking data back. And we would have a better understanding. In IHOP, the category, is not -- you know, it is not like it is do be fabulously well, so when you talk about a shrinking category, we have obviously got to get our fair share, but I will probably be in a better position to tell you, are those visits going somewhere, are they less frequent, are they shifting day parts, I will be in a better position to answer that after the tracking data comes in the first quarter.

Great. Thank you very much.

Thanks, Rachel.

Thank you.

Ladies and gentlemen, as a reminder, please press star one for questions. We have no more questions at this time. I would like to turn the presentation back over to Julia Stewart. Please proceed, ma'am.

Akia, thank you so much and thanks to all of you for joining the call today. Should you have any additional questions, you know that Tom and I are always available. Otherwise, we look forward to speaking to you again shortly as we will currently plan to hold an investor conference call upon the close of the acquisition of Applebee's. So thank you and make it a good day.

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. And have a great day.