Dine Brands Global Inc (DIN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2007, IHOP earnings conference call. My name is Angelique, I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call miss Stacy Roughan. Please proceed.

Good morning, and thank you for participating on IHOP's fourth quarter 2007 and 2008 financial performance guidance conference call. Today with us from management are Julia Stewart, Chairman and CEO, Tom Conforti, CFO, and Greg Kalvin, Corporate Controller. Before I turn the call over to the management team, 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 to you evaluate such forward-looking information in the context of these factors which are detailed in today's news releases, as well as in our most recent Form 10-Q filing with the Securities and Exchange Commission. In addition, I have disclaimed any intent or obligation to update these forward-looking statements. Additionally on this call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our two press releases today, which are available on our website ihop.com. Now I'd like to turn the call over to Julia Stewart.

Thanks, Stacy. And good morning, everyone. I hope all of you have had the opportunity to take a look at this morning's news releases. We're eager to review the details of our results for the fourth quarter and fiscal 2007, as well as discuss our performance expectations for 2008. We have a lot of ground to cover today so let's get started. 2007 was nothing short of an extraordinary year for our company. It was one in which we continued the strong momentum of the IHOP brand ending the year with an impressive 20th consecutive quarter of same-store sales growth. 2007 was also a year in which we began to leverage our core competencies around franchising and brand building with the acquisition of Applebee's. It was a year of successes and challenges culminating in the addition of a second great brand, making IHOP Corp. the largest sitdown restaurant company in the world. In the first 90 days of running Applebee's, we've made significant progress towards our transformational goal for the business. And at IHOP, we've begun the year long celebration of our 50th anniversary and expect a full-year of exceptional marketing and promotional opportunity, which coupled with superior operations support, should make the year 2008 one of IHOP's best. First, let's take a quick look at our performance of 2007 starting with IHOP. Our core franchising business continued to perform well in the fourth quarter in fiscal 2007.

We ended on a strong note with our highest same-store sales growth for the year at 3.7% in the fourth quarter and we met our franchise restaurant development expectations for the year. IHOP's G&A expense growth, excluding $3 million of acquisition-related costs that could not be capitalized, was managed to 4.4% within our stated growth target. We returned a total of $77 million to shareholders by repurchasing more than 1.3 million shares of IHOP stock in addition to the $17.3 million in dividends paid out to shareholders of common stock in 2007. Additionally in 2007, our accomplishments at IHOP were the result of a continued dedication to our three-fold strategy of energizing the brand, improving operations, and maximizing franchise development. Now, looking at our brand efforts, we benefited from a strong promotional calendar with limited time offers, unique to IHOP that motivated guest visits to our restaurant. We expanded the reach of our advertising message with enhanced national media buying strategies that helped raise guest awareness throughout the year.

We completed a system-wide menu update last November, which included nine new menu items from new pancake flavors to barbecued pork ribs and chicken, all of which were the result of IHOP's ongoing consumer research aimed at maintaining a menu full of new, fresh, and appealing items. In 2007, we focused on raising the operational standards of IHOP's system by refining our A/B operator rating program. As of the end of 2007, 85% of IHOP franchisees were rated as either an A or a B operator. This reflects a decrease from 90% plus in prior quarters as the system adjusts to our new higher operational standards. We expect the number of A/B operators to increase throughout 2007 and 2008 as IHOP franchisees raise the bar and fully implement these new standards. Additionally, the introduction of the new training programs last year emphasizing service as good as our pancake has truly resonated with franchisees and employees. And has had a positive impact on our guests. We will continue to build upon these initiatives in 2008. Now, our efforts to maximize franchise development in 2007, resulted in the opening of 60 franchise and area license IHOP locations, two of which represented our first restaurants in Mexico and the U.S. Virgin Islands.

We ended the year with a strong development pipeline, which included a total of 467 committed, pending, or optioned IHOP restaurants that are expected to be opened over the next several years. Franchisees also remodeled 207 existing IHOP restaurants last year. Approximately now 57% of the system has the new ICON design element.

Turning to Applebee's, as you know, we completed the acquisition on November 29th and our 2007 results reflect one month worth of the company's financial performance last year. 2007 continued to be a challenging year for the business. And while Applebee's same-store sales' weakness persisted and company restaurant margins deteriorated last year, I can assure you these are the exact areas where our intention is now focused and it is our highest priority. With the close of the acquisition behind us and with new leadership in place, we're eager to turn the tide of our associates, our franchisees, and our brand, and to begin moving in the right direction. In a moment, I'll share some our early accomplishments and our plans for Applebee's going forward. But first, I'd like to turn the call over to our CFO, Tom Conforti, for a discussion of IHOP Corp's financial results for 2007.

Thanks, Julia. Today, I'd like to quickly walk through the key contributors to our strong financial results for the fourth quarter and fiscal 2007. As a reminder, the financial impact of Applebee's is reflected in our fiscal 2007 consolidated results only since the date of the acquisition, November 29, 2007, or essentially one month's worth of operating results. In addition to the financial details, I will share in my prepared remarks today, it is also our intent to file our Form 10-K within the next business day and I encourage you to read it closely.

Starting with EPS, we reported a loss of $0.94 per diluted share for the fourth quarter of 2007. For fiscal 2007, we reported a net loss per diluted share of $0.13. These losses primarily resulted from the recognition of a required interest rate swap transaction related to the acquisition financing, which was settled during the fourth quarter, but also impacted third quarter results. The swap was intended to hedge IHOP's interest payments on the notes issued in the securitization (technical difficulty - interference) related to the Applebee's acquisition. This hedge was required by the bond insurers and rating agencies once our bid for Applebee's was accepted. Between the time the hedge was put in place and the time we completed the financing, the five-year swap rate, which was our hedge rate, fell considerably. This drop in rates resulted in a $124 million swap settlement impact. This resulted in an expense of $26.5 million for the fourth quarter and an expense of $62.1 million dollars for the year, which were recognized on our P&l. The remaining portion of the hedge, $61.9 million will be deferred and amortized to interest expense over the expected lives of the notes approximately 4.2 years. Now, excluding the hedge settlement, EPS for the fourth quarter 2007 would have been one penny.

For fiscal 2007, excluding the hedge accounting impact and debt repayment costs associated with our March 2007 securitization, EPS would have been $2.14 per share, a decrease of 12%. These decreases were primarily due to increased interest expense on $2.3 billion worth of funded debt of $28.7 million for the full-year. For the quarter and year, G&A was higher due to the inclusion of Applebee's G&A spending in December. Also, G&A increased to $69.3 million at IHOP, including $3 million of spending related to the acquisition that could not be capitalized. Additionally, we took a $4.3 million asset impairment charge related to company operations. Looking at income taxes, our quarterly tax rate was 35.1% versus 38% in the third quarter of 2007. This reflects the benefit of compensation-related tax credits. For fiscal 2007, we recognize an income tax benefit from continuing operations of $2.2 million for fiscal 2007 versus an income tax expense of $28.3 million for fiscal 2006. The overall reduction in income taxes was primarily due to a taxable loss of $2.8 million in fiscal 2007 versus taxable income of $72.9 million in fiscal 2006.

Finally, a reduction in diluted weighted average shares outstanding due to share repurchases by the company made over the past 12 months also positively impacted our 2007 diluted net income per share performance for the quarter and for the year. Turning to a review of our segment performance, let's focus on our yearly results beginning with our core business franchise operations. Consolidated franchise operations revenue grew by $26.4 million or 14.7% in 2007 as compared to 2006. This was primarily due to the inclusion of one month's results from Applebee's, which increased franchise revenues by $14.2 million or 7.9%.

In addition, the franchise operation segment profit at IHOP increased 7.1% due to an increase in IHOP franchise retail sales. This increase was primarily attributable to a 4.5% increase in effective IHOP franchise restaurants and a 2.2% increase in same-store sales for IHOP franchise restaurants for the full-year 2007.

Looking at rental operations, rental operations profit decrease by 0.5% in 2007 as compared to 2006. And this decrease reflects lower levels of deferred rent being recognized.

Turning to financing operations, we first want to mention we've decided to extract interest expense related to debt from this segment and isolate it in our disclosures. Given the amount of leverage our company has taken on, you can understand our rationale.

Financing operations profit excluding interest expense decreased by $1 million or 5% in 2007 compared to 2006, primarily reflecting the decrease in franchise and equipment notes interest. This was due to the expected reduction in franchise fee and equipment note balances we see taking place as franchisees pay their obligations.

Now finally, turning to company operations, total company restaurant sales in 2007 increased by $112.3 million, compared to 2006. The increase in total company restaurant sales was almost exclusively to the Applebee's acquisition, which contributed $108.8 million of the increase. Company operations loss for IHOP company operated restaurants was $2.5 million or 23.5% higher than the loss of $2 million in 2006. This was primarily due to the lower sales per restaurant at the IHOP company restaurants in Cincinnati, as well as higher salary and benefits costs.

Looking at general and administrative expenses in more detail, G&A increased by $18.1 million or 28.4 % in 2007 compared to the prior year, primarily due to one month of Applebee's expenses in the amount of $12.3 million. G&A expenses for IHOP increased in the amount of $5.8 million or 9.1%, primarily due to increased professional services and compensation expenses. Professional services increased by $3.9 million in 2007 compared to 2006, $3 million of which was resulted from the consulting fees related to the integration of Applebee's that couldn't be capitalized. Looking at interest expense for the year, we recognized $20.8 million of additional interest expense due to higher levels of debt associated with the securitization financing, primarily due to the acquisition.

Turning to cash flow, cash flows from operating activities increased 63.9% for fiscal 2007 to $106.3 million compared with $64.9 million for fiscal 2006. This increase was primarily due to $41.8 million from the one month of Applebee's operating activities. Cash from operations performance at IHOP was strong at $64.6 million for 2007. In addition, principal receipts from notes and equipment contracts receivable, which are an additional source of cash generation for the company amounted to $16.6 million for fiscal 2007. You'll note on our year ending balance sheet that we reflect approximately $186 million in restricted cash. This restricted cash is primarily the result of our securitization requirements for interest reserves and cash disbursement. Capital expenditures increased to $11.9 million for fiscal 2007 compared with $9.4 million for fiscal 2006.

The increase in CapEx reflects the inclusion of Applebee's capital investment primarily related to the development and maintenance of company restaurants and the move to its new restaurant support center among other items in December 2007. This was offset by a reduction in IHOP CapEx to less than $3 million consistent with the company's plan not to open any locations in its dedicated company market of Cincinnati, Ohio in 2007.

Lastly, I'd like to quickly cover the preliminary results of our purchase price accounting efforts. As you may know, accounting rules require us to complete our purchase accounting analysis and allocations within one year of the close of our acquisition of Applebee's. To date we have made substantial progress for the required allocations of the $2 billion purchase price of Applebee's. The preliminary purchase price allocation is comprised of approximately $700 million of tangible net assets and approximately $1.3 billion net of deferred taxes of intangible assets. Of the $1.3 billion, $200 million is applied to franchise agreements, which will be amortized over approximately 20 years. The remaining allocations are comprised of Applebee's trade name and goodwill. The intangibles are still subject to some change but we expect the allocation to be materially complete in the first half of this year. With that, I'd like to turn the call back to Julia.

Thanks, Tom. I would like to transition to a discussion of our expectations and objectives for 2008, from a strategic and financial perspective for Applebee's, IHOP, and our parent company. Now, as you know, we share that our primary financial goal of the Applebee's acquisition was to realize the free cash flow potential of the business by transitioning its model to a more highly franchised one and successfully re-energize the brand. Now for this reason, we will be focusing much of our commentary around free cash flow as we believe it is the most important measure for investors in 2008 and beyond. Our ability to generate significant free cash flow is one of the primary benefits of operating a highly franchised business.

And once we pay certain obligations, it's our intention to once again return excess cash back to shareholders over time. Therefore, we will focus the discussion today on cash measures of performance and will not provide guidance on EPS measures. Tom will walk you through this in more detail in a moment.

Now in 2008, it will be difficult to predict our performance and therefore, we caution investors about the high degree of variability in our financial results because of the significant transactions we are contemplating around sale leaseback, as well as the impact of timing of franchising within the Applebee's business. Now, as it relates to the IHOP business, we'll continue to provide detailed 2008 performance guidance as in prior years. We expect to see a continuation of the steady, predictable financial results at IHOP that have been the hallmark of our performance over the past several years. I'd like to start by walking you through our strategic agenda for both businesses.

So let's start with Applebee's. Now, we believe the Applebee's acquisition represents the perfect opportunity for our management team to apply our core competencies of franchising and brand revitalization to what we believe is an under-managed but great brand. Applebee's met all of our strategic acquisition criteria in terms of brand opportunity, size, financial impact, industry position and then some.

Now, some of you may recall that before joining IHOP I was the President of Applebee's domestic division. My prior knowledge of the brand, positive relationships with Applebee's franchisees and the support of Applebee's associates, some of whom I brought into the organization, have proven invaluable as we work together to quickly capture the opportunities that lie before us. I want you to know that I'm personally running the Applebee's business as we search for a new President. So it is with confidence I can say today more than ever I believe in the value that the acquisition of Applebee's represents to IHOP Corp and its shareholders. Together we're going to be a more successful, more powerful than ever before business could have been apart. We believe we can make meaningful improvements throughout the Applebee's system by pursuing a similar strategic approach to revitalizing the business as the one that has proven so successful at IHOP.

To that end, we've developed a familiar strategic framework that will guide our efforts in 2008. Our agenda for Applebee's is focused on one, re-energizing the brand, two, improving operations execution and three, improving company restaurant profitability. It's amazing that in just 90 days, we've made considerable progress in each one of these areas. We've implemented a plan to return Applebee's comparable sales performance to positive territory and achieve our objective of 1% to 2% system-wide same-store sales growth for the full-year 2008. Company operated restaurant same-store sales are also expected to grow in the 1% to 2% range. We are very encouraged by the early results we're seeing already.

We set the foundation for this turn around in the last 60 days and are nearing completion of Applebee's new brand positioning and refined customer targets and segments. In so doing, we've established a new brand filter through which all of our efforts will be evaluated and aligned. Next, we've addressed the Applebee's advertising and are launching a new, more effective campaign this coming Monday March 3rd. The ads aggressively reinforce Applebee's position as the leader in grill and bar segment and the message is clearly focused on innovative, classic grill and bar food that you can only get at Applebee's.

Additionally, we're working on a new marketing calendar that is to motivate existing guests to visit Applebee's restaurant more often and lapsed users to come back and try us again. We'll also focus on engineering and simplifying our menu. Over time, the size of the menu has grown, presenting operational challenges and resulting in increased costs of doing business. The good news is that we believe we can make quick and substantial changes to begin moving the menu in the right direction. We also have an opportunity to improve the quality of our food by reviewing and upgrading key specifications to ensure Applebee's serves the best-tasting products possible and an enhance beverage program is expected to play an important role in bringing excitement back to Applebee's restaurants in enhancing sales and profits at the restaurant level.

Now our second key strategy, improving operations execution will center on the introduction of an operator rating system, similar to the A/B program we currently employ at IHOP restaurants. This system will establish definitive operating criteria against which franchise and company-operated restaurants will be measured. Training programs will also be updated with an emphasis on flawless execution. Additionally, our focus on operations execution includes ensuring that franchisees meet their development commitments. Our objective is to add approximately 50 to 65 new Applebee's restaurants to the system in 2008, 30 to 40 of which are expected to be open in the U.S. and 20 to 25 internationally. We will discontinue company restaurant development as we begin to downsize our company store pool through franchising. Due to construction commitments in place prior to the acquisitions, we expect to open no more than two company-operated locations in 2008.

Our third strategic agenda item, improving company restaurant profitability represents an important opportunity. Applebee's company restaurants have experienced significant erosion in margin over the past few years. We've already begun taking steps to capture low-hanging fruit on the cost side. In January we entered a 90-day action plan aimed at driving a 150 to 200 base point improvement in company margins. We're optimistic about the early results we're seeing. In addition to increased profitability, these improvements are important to our franchising efforts and should help us to maximize proceeds as we franchise nearly all of the company-operated Applebee's over the next three years. Now, let me walk you through our business transformation goals for the Applebee's business unit. We expect to franchise approximately 100 company-operated Applebee's restaurants in 2008.

We've received a high degree of interest in franchising company operated units with a significant pipeline made up of potential buyers, including a large majority of Applebee's existing franchisees, a number of IHOP franchisees, new franchisees from other chains or related service industries and potential private equity sources. Now it's difficult to predict the timing of these sales as programs aimed at improving company restaurant margins before the deal are struck may mean franchising delays until later in the year. We do have two markets already identified for sale and are currently fairly far along in our negotiations. We expect to announce signed deals sometime in March or April. Now in addition to the 100 units we expect to sell this year, our objective is to exit 2008 with as many as 60 additional restaurant commitments agreed to, pending final sale. We expect that after-tax cash proceeds from the franchising of approximately 100 restaurants should range between $90 million and $100 million in 2008.

Now, in addition to our franchising efforts, we expect to generate additional cash from the sale leaseback of approximately 190 Applebee's company-owned restaurant locations in 2008. At this point, we received preliminary second round bids and anticipate closing the sale leaseback transaction in the second quarter 2008. After tax cash proceeds from the transaction are expected to be approximately $350 million. In addition, we're in the process of negotiating a purchase agreement on Applebee's restaurant support center headquartered in Lenexa, Kansas. We expect this to generate approximately $40 million in after-tax proceeds when completed sometime in the second quarter, 2008. So we expect total cash proceeds of between $480 million and $490 million from our franchising and sale leaseback efforts in 2008. Most of this will be earmarked for the retirement of funded debt. However, the proceeds from the sale leaseback of the restaurant support center will be used to pay certain outstanding obligations which remain from the acquisition transaction.

Looking at our long-term expectations for franchising proceeds, we expect that our franchising efforts over the next two to three years should generate a total of between $400 million and $450 million in after tax cash proceeds. This includes the $90 million to $100 million expected this year. So, when you add in our proceed expectations for sale leaseback of restaurant real estate and Applebee's restaurant support center, the total after tax cash proceeds from the business model transformation of Applebee's should range between $790 million and $840 million.

Now turning to the IHOP business unit, efforts to build upon our momentum will continue to be guided by the same three key strategies that have proven so successful in prior years, energizing the brand, improving operations, and maximizing franchise development. We plan to drive sales momentum at existing IHOP locations with a targeted 2% to 4% growth and system-wide same-store sales for 2008. This growth will be supported by a strong national advertising presence to promote our six planned limited time offers. We began the year with our successful all you can eat pancake promotion and are currently running a new limited time offer for shortcake pancakes. Our lineup for the balance of the year is terrific, filled with new and unique promotions. 2008 also represents an important milestone for the IHOP brand as we celebrate our 50th anniversary.

From our biggest National Pancake Day ever, to a summer filled with exciting limited time offers, and other special events and promotional opportunities, the IHOP team has a fantastic marketing calendar lined up to celebrate our 50th. National Pancake Day on February 12 this year was IHOP's biggest one-day event in the company's history as we gave away 1.5 million pancakes. We received a tremendous amount of publicity from both national and regional media outlets and raised $875,000 to benefit the charity Children's Miracle Network. It was a terrific event. Next week, IHOP will introduce special promotional items to support the launch of 20 Century Fox's new animated film based on Dr. Seuss' classic children's book, "Horton Hears a Who!" You have to see it to believe it. What an incredible year IHOP has planned.

Now looking at operational excellence, improving operations throughout the IHOP system will continue to be a primary focus in 2008. Our efforts will center on the increased performance threshold of our A/B operator rating system and IHOP's service as good as our pancakes training platform. Turning to maximizing franchise development this year, we expect IHOP franchisees to open between 65 and 70 new IHOP restaurants. New IHOPs are slated for development primarily in the U.S. with a handful of new restaurants expected in Mexico, one in Canada, and one in Puerto Rico. We expect franchisees to meet their contractual obligations, to remodel approximately 225 existing IHOP restaurants in 2008. This year we'll also begin to look at the next evolution of IHOP's remodel package to provide both continuity and stewardship for our ongoing mandatory five-year remodel program. As you can tell, there's still plenty of upside present in each of our core strategies and we'll continue optimizing our approach in 2008. With that strategic overview, I'd like to turn the call over to Tom for a more detailed discussion of our 2008 financial performance objectives and guidance.

Thanks, Julia. I'd like to walk you through our performance expectations for 2008 in a little more detail. As Julia mentioned, we believe free cash flow is the most important financial measure to address and was the key financial rationale for our acquisition of Applebee's. I'd like to start my comments first with our definition of free cash flow, which we define as consolidated cash from operations plus the runoff of the IHOP business unit's long-term receivables, less consolidated CapEx.

Now, let's walk through our expectation for each of these components in 2008. Consolidated cash from operations is expected to be approximately $100 million or approximately $5.55 per share. This figure reflects the one-time impact of significantly lower accounts payable of approximately $23 million expected this year as we take hold of the Applebee's business.

In 2008, we expect to see a decrease in accounts payable due to the cessation of Applebee's company restaurant development, completion of the Applebee's support center in late 2007 and a reduction in payables related to Applebee's national advertising fund. Now, at the same time, we expect to see an increase in accounts receivable as we franchise Applebee's restaurants in 2008, and begin to build royalty receivables.

This latter effect, by the way, will stay with us as we complete our franchising over the next two to three years. Our cash performance is expected to be augmented by approximately $17 million or approximately $0.95 per share from the structural runoff of the IHOP business unit's long-term receivables in 2008. So total cash generations, which is cash from operations plus the receivables runoff, for 2008 is expected to be approximately $117 million or approximately $6.50 per share. Looking at capital expenditures, we expect our consolidated CapEx needs to be approximately $25 million in 2008.

This is comprised of an expected $12 million to $16 million in capital investments at the Applebee's business unit in 2008. Now this dramatic decrease from historical levels of $99 million in 2007, reflects our move away from the company restaurant business, in favor of leaving future restaurant development in the hands of franchisees. And I'm pleased to say that this reduction gets us in the range of our stated maintenance CapEx levels of approximately $15 million in year one after the close of the acquisition, instead of year three as we had modeled. Consolidated CapEx also includes minimal capital needs at the IHOP business unit which is expected to range between $4 million and $6 million. And finally, at the corporate level, we expect our capital needs to range between $7 million to $8 million in support of IT and infrastructure investments.

Taking into account our capital needs, free cash flow should be approximately $92 million in 2008. That brings free cash flow per share to approximately $5.11 per share in 2008. And as we get through this transition year, we only expect our free cash flow performance to become stronger due to the growth of our business and a reduction in our working capital burden. Additionally, as Julia mentioned, we expect to generate additional sources of cash between $480 million and $490 million in after tax proceeds through franchising company operated Applebee's restaurants and the sale leaseback of company-owned Applebee's locations and the business' restaurant support center in 2008. In 2008, the primary uses of cash will include approximately $450 million in consolidated funded debt repayment. We also expect to pay off outstanding obligations related to the acquisition of approximately $70 million in 2008.

This primarily reflects unpaid transaction related expenses which will be reflected in cash from investing and financing activities in 2008. We also expect to pay dividends of approximately $17 million and $19 million to be paid to common and preferred stockholders respectively in 2008. Our goal is to begin to redeem the prepared stock sometime in 2009. You can tell from my comments that we managing our cash position closely as we pay interest on our funded debt and meet one-time obligations. Company-wide, our executive teams are focused on cash management and will be held accountable to achieve our cash goals.

Now, let's transition to a review of our expectations for G&A expenses. We expect consolidated G&A to range between $186 million and $199 million in 2008, which compares to $268.2 million of pro forma consolidated G&A for the full-year 2007. The 2008 figures are exclusive of approximately $12 million in one-time retention bonuses and severance costs relate to the acquisition. G&A expenses at the Applebee's business unit are expected to range between $95 million and $100 million in 2008. This planned reduction in expending takes into account lower headcount, associated with the reduction of corporate personnel already taken and planned reductions related to franchising company operated units. We expect the savings associated with the franchise will be modest this year and to pick up significantly in 2009, as we make further progress in franchising.

At the IHOP business unit, G&A is expected to range between $53 million and $57 million in 2008, representing very little incremental spending and inclusive of reductions associated with the transfer of certain costs to the parent company level. Corporate G&A, which includes shared services, is expected to range between $38 million and $42 million in 2008. Our consolidated G&A expectations of 2008, are ahead of our plan in year one. Now, as it relates to guiding on segment profitability, at least for the time being, we will only be directing our comments around the IHOP business unit as there is a high level of variability within the Applebee's business in 2008, due to the timing and scope of planned franchising activities and sale leaseback activities.

We expect IHOP's highly-franchised, significant cash flow, low CapEx business to continue to grow in a consistent manner with little volatility and overall financial performance in 2008. We expect IHOP's franchise operations profit to range between $110 million and $115 million in 2008. 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 2008. Weighted average royalty will be approximately 4.35%. The sale of proprietary pancake and waffle mix adds approximately another 70 basis points of total system sales to segment profitability.

Turning to IHOP's restaurant operations, we expect this segment to range between $33 million and $36 million in 2008. This is our second most profitable segment and growth in rental operations will continue to be essentially flat for the foreseeable future as we work to retain profitable relationships among our franchisees, the company, and the landlords from more than 700 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. The offset to this growth is that each year we close and/or renegotiate lease agreements at old model restaurants. Moving to IHOP's financing operations, we expect financing operations profit to range between $18 million and $20 million in 2008. Financing operations represents financing activities under IHOP's old business model, franchise and equipment financing activity, which is a declining segment contributor due to lower interest income note balances which decrease over time.

Finally, we expect IHOP's company operations to produce a loss in 2008 of between $2 million and $2.3 million. Company operations primarily reflects the performance of our unit's IHOP's company operated restaurants in Cincinnati, as well as the cost of potential restaurant takebacks. From time-to-time, franchised IHOP restaurants developed under our old model may be taken back, but our goal is to sell the restaurant without taking possession of the unit whenever possible.

With regard to the performance of Applebee's business unit, we will not be providing specific segment profitability for 2008 due to uncertainties about the timing and financial impact that sales leaseback and franchising company operated Applebee's would have on results. 2008 is going to be a very difficult year to model. So as Julia mentioned, we encourage investors to particularly focus on our top line same-store sales and franchise restaurant development goals, our objective of franchising approximately 100 company-operated restaurants, and the anticipated margin improvement at company restaurants as we work through this transition year.

Looking at interest expense, we expect consolidated interest expense to be approximately $190 million, exclusive of capital lease interest payments. Approximately $67 million of that will be noncash expense for 2008. Now, before I turn the call back to Julia, I'd like to share what we believe the accounting treatment on the sale leaseback will be. As Julia mentioned, we're currently in negotiations with prospective buyers for the sale of approximately 190 Applebee's company-owned real estate parcels and the business' headquarters in Lenexa. Both of these sales are expected to be completed in the second quarter of 2008. Given the likely continuing involvement from an accounting perspective for both pending transactions, qualification for a full sale under the sale leaseback accounting rules is unlikely.

Continuing involvement means that after the sale either of the following occurs -- one, a sublease, with a new franchisee for the company owned parcels or another tenant for Lexena or two, a form of economic support to the buyer with respect to assigned lease payments. Economic support will be any situation where Applebee's in substance is guaranteeing any portion of the lease payments on behalf of a franchisee or Lexena tenant to the buyer. Once Applebee's ceases continuing involvement, full sale recognition can occur and can occur on a property by property basis with respect to the company owned real estate.

Under the current accounting rules, full sale recognition means that the real estate asset is removed from Applebee's books and a gain or loss is recognized. Given that the transaction is expected to occur close to the valuation of the real estate under purchased accounting, a gain or loss should be minimal if any. Now given the likely scenario that Applebee's does not qualify for full sales recognition due to continuing involvement, Applebee's would be required to treat the sales proceeds like additional borrowings against the sold property with the Applebee's lease payments to the buyer treated similar to an amortizing loan payment. The P&L impact of this likely scenario for 2008 is expected to be approximately measured in some millions of dollars in additional pretax expense, a substantial portion of which is expected to be non cash, related to depreciation. This number is expected to be eliminated over an approximately three year period as Applebee's ceases its economic continuing involvement upon the franchising of the restaurants. With that, I'd like to turn the call back to Julia.

So, from a financial performance perspective, the focus for this year and for years to come is free cash flow per share. This is how we will be looking at the business and we obviously encourage you to do the same. This is truly an exciting time for our company and the year in which we will experience a great deal of change. We will need to overcome our fair share challenges as we remain focused on transforming the Applebee's business while continuing IHOP's exceptional track record of performance. I'm confident we are up for these challenges. Now with that, Tom and I would be pleased to answer any questions you may have. Operator.

Thank you. (OPERATOR INSTRUCTIONS) Ladies and gentlemen, your first question comes from the line of Bryan Elliott of Raymond James.

Good morning and thanks for distilling all that down so effectively in the period of time you did. Tom, I just wanted to drill a little, and I guess Julia, you can help as well a little into the CapEx discussion, particularly thinking about the Applebee's stores and the maintenance CapEx historically on those stores is substantially higher than implied by your guidance here and just walk me through the thinking behind that reduction.

Let me give you the top line and then, Tom can certainly drill deeper. It is not our intention to do a massive amount of remodels this year. We'll, obviously have plenty of R&M money in the budget. They have been kept in very, very good shape. Management has assured me of that. I've obviously seen some of that myself as I've been out and about. But we have not put a tremendous amount of CapEx, none to speak of, in the budget for remodels because obviously as we sell them, we'll have the franchisee take over that process and I felt it was much more important not to do the remodels, but to focus on the kitchen and the back of the house. Tom, I don't know if you want to go any more --(multiple speakers)

No, I think Julia touched on it Bryan. There's limited CapEx. We're only going to open, we may open two.

Yes, that I understand. I'm -- just the maintenance, just the per-store maintenance CapEx.

No, we have used the conventional measures that Applebee's has used for maintenance CapEx.

What's an average R&M budget?

Yes, what was the other -- I think it totaled at -- the total amount is like $7 million or $8 million of maintenance CapEx.

There's plenty in there, Bryan.

But Brian, we have urged Applebee's management to employ a great deal of discretion about how they apply that, so we have a new approval process that we've implemented at Applebee's, where important maintenance CapEx requirements within the store needs to get enough visibility at the right levels so that the prioritization of expenses take place. So there's a little bit of that at work that we can put.

Alright, thank you.

Okay, Brian.

Thank you.

Your next question comes from the line of Rachael Rothman of Merrill Lynch. Please proceed.

Hello, Rachael.

It's actually Mike Shanks for Rachael.

Hello, Mike.

How are you? I just wanted to make sure I understand the financial impact of the sale leaseback. I don't know, you kind of walked through it. Could you run through what the cash flow impact of that is again? Is it still the 390?

Yes, no cash flow impact on that, it just -- the accounting treatment is not going to be a sales accounting treatment. And therefore, what will happen is that the assets will stay on our books and there'll be a higher depreciation charge. So, there is no real cash flow impact. It's just an accounting treatment differential.

Okay, thanks a lot.

Okay, Mike.

Your next question comes from the line of Michael, I'm sorry, Steven Rees of J.P. Morgan. Please proceed.

(technical difficulty -- operator error) profitability near term. Can you just talk about what some of those examples are and how you kind of framed that in the context of also wanting to improve quality or seeing the opportunity to improve quality?

Steven, I'm so sorry. Your first part of your question was cut off. Can you repeat that for us?

Yes. You mentioned that there was some low hanging fruit opportunities at Applebee's in terms of improving store level profitability, I just wanted to know if you could site some examples of what you're seeing there and how you put this in the context of wanting to also improve quality at the stores?

Sure. A lot of the things that were put in place the company operations, I think biggest thing I have done is (multiple speakers) Hello? To answer your question again, what I've done is really tried to put in place, allowed management their -- to sort of take off the handcuffs and say okay, if you were owning and operating it -- if you were a franchisee, what would you be doing? And some of the programs that company ops had in play really were handcuffing the operators. So, a lot of what I'm seeing is streamlining, whether it's inventory, whether it's labor management, whether it's food cost system, a lot of what they were doing there was sort of handcuffing. So, think of us as putting some programs and processes or simplifying things in play, so we look a lot more like a franchise business. And so short run in the company operations that's a large majority of what I'll call low-hanging fruit. Beyond that now, we'll start talk talking about menu enhancement, back of the house simplification (multiple speakers)

LTO simplification.

Yes, LTO simplification.

Higher margin (multiple speakers)

A lot of higher margin items being marketed, so longer term, think of it as more of the strategic business platforms, but short-term there are clearly things in company operations that franchisees wouldn't do. In addition to all that, we were able to take some placing at the beginning of the year, that company ops had not historically done. So they were running a significantly lower price per item than franchisees were. So think of us, when I say low hanging fruit, think of it as more catching up if you will with the franchise business.

With a clear emphasis, Steven, on the operators knowing that maximizing the profit margin is going to be an important matter. And we've simplified what their objectives are and said we really do need to find that 150 between 200 basis point improvement on margins.

I have a high confidence level that they can get there.

Okay. And have you assumed that sort of improvement the 150 to 200 in your modeled cash flow expectations in 2008?

We have, yes.

Okay. And then, can you just help us understand how the sales leaseback will impact company store margins for that business?

You know -- and my controller's here, so he'll guide me in case I make a mistake here, but because it's not going to receive sale accounting and it's going to be treated at the capital lease, we're really not going to have increased rent expenses within the margin of company stores. What's going to happen is we're going to have an interest expense associated with the capital leases that will be captured in our rental margins -- in our rental operations segment. But Greg if -- have I --?

Yes, that's correct. That's correct Tom. This is Greg. It will be treated as an amortizing loan payment. For example, lease payments will be applied against the debt, if you will. It will be put on our books when we receive the proceeds.

And the guidance you gave for the rental segment was just IHOP's -- it didn't take?

That's correct.

Okay, and then just -- do you feel comfortable giving me like a D&A forecast for 2008 and 2009.

Yes, we have not really guided there before. Let me think about it, Steven. If we do, we'll file an 8-K, so that everyone can know that number.

Okay. And then finally, just on the -- your same-store sales target, it does assume a pretty significant acceleration from in the most recent reported trend. Have you seen trends improve year to date or sort of what gives you confidence that you can end the year on a positive note? And if you can break out how much of that would be due to pricing versus traffic? Thanks.

Well, we're not going guide that for 2008 for Applebee's, but I think all I can do is reassure you that as I said in our script, even in the short term, we have been very surprised and excited by the kinds of things we're seeing in Applebee's. The plan we're putting in place for years. So, think about it. New advertising, new marketing calendar, new menu, focus on operations improvements, all those things point to increase in comp sales, both in traffic and in average check. So, I have a pretty high confidence level. And the franchisees, and I think this is probably the most important point, have been -- all 43 of them have been incredibly supportive. I didn't mention this, but the franchise business council -- we have the equivalent of IHOP of the B of A -- they are meeting with me every 30 days. That's how incredibly supportive they are. And they, too, believe that it's possible with these strategies we've put into play. So, I have a really high confidence level. I didn't talk about this on the script. But, somebody asked me the other day, what do you think you get from having had all that experience with the franchisees before? I said, about a year, because it took almost a year to sell those programs. And at IHOP, with 400 franchisees, it took one meeting to do that with 43 franchisees, so I have a very high confidence level.

Okay, great. Thank you very much.

Thank you for asking the question.

Your next question comes from the line of Michael Gallo from CL King. Please proceed.

Hi, good morning.

Hi, Mike.

Good morning, Michael.

Most of my questions have been answered, but I just had a couple of follow-ups. One, I was wondering if you were seeing any supply chain benefits to the IHOP side from just the shear size obviously of the combined operations and then, I have a couple of other follow-ups, thank you.

Let me answer the supply chain question which is that we are looking as we speak with the help of our franchisees on both sides and the head of supply chain management here at the corporate parent company of trying to form a co-op. And so that's going take some time and some effort and combining literally the buying power of IHOP and Applebee's. So, it's too soon, certainly there are some small synergies, we're just seeing as we speak. But the real impact and the real opportunity for the franchisees, which would have significant basis point improvement in 2009 and beyond, would be if we can form that co-op. So, it's too soon to say too much to that regard. But I am really excited about the prospect as are the franchisees. I think there's probably initially more low hanging fruit if you will on the IHOP side just because Applebee's has done significantly more effort there. But, I think longer-term, there can be real balance of support and real opportunities. So, short-term, the answer is not anything significant, but in the longer term, a huge opportunity if we can form a co-op.

Okay. And then, just a second question, kind of a follow up question. How much pricing is currently in the Applebee's menu on a year-over-year basis? I know you mentioned you took some price on the company side in January?

Mike, we're not sure what the pricing decisions were at Applebee's earlier in the year, but since we've taken over, I think the pricing increase, Julia, was around 3%.

3% on the company restaurants. I can't speak to the franchise restaurants. We don't -- we get that data. You can ask me that question probably in six months and I'd be savvy enough to answer it. But I know in the short run

That's important (multiple speakers)

Yes, the company ops piece was about a 3% all in. Now, what they took last year, I'm not privy to that. We could be by the next call.

Yes, we have to train ourselves a little better. When we said 3% pricing, we really just meant company-operated restaurants.

Right. We're working on getting those franchise numbers for you. We should have that by the next call. It's a great question.

And I guess along those same lines, I think you mentioned you expected the company unit same-store-sales to increase 1% to 2%, and a similar number on the franchise side. But then you indicated that you had kind of taken some catch up pricing on the company side, because their prices tended to be lower. So I just wanted to kind of reconcile why you would expect a similar comp increase. It seems like I guess it's more pricing.

You know Mike, I'd attribute it to just conservative guidance and there may be a distinction between company and franchise that hasn't been historically the case within the Applebee's system. We haven't been running the business long enough to assume a big difference and so I would say that we're just kind of giving general system guidance. But Julia is thinking through something and probably has more insight than I do on that.

No. I just -- I think the company for the year was a slightly more negative comp sales for 2007 than franchise. So we certainly (multiple speakers)

It's been that way historically.

Yes, it's been that way historically. So I think we certainly took that, management took that into account. And you never know what we're going to be selling and what we're going to be keeping and that my have some impact some in terms of the mix. So I think it's fair to say it was a conservative estimate.

Okay, great. Thanks a lot.

Thank you for the question.

Your next question comes from the line of Amy Minella of Cardinal Capital Management. Please proceed.

Good morning.

Hi, Amy.

Good morning, Amy.

A couple questions. I just wanted to figure out when you were talking about the accounts receivable and payables for 2008.

Right.

If you netted the two, I was a little confused as to whether it's going up or down.

Yes, Amy, payables are coming down in 2008 because there were expenditures related to the finalization of the company headquarters. There were construction costs related to opening of restaurants that won't be happening at the end of 2008, and there was a significant payables associated with advertising that is not likely to be replicated in 2008. That change in payables is around $20 million.

And on the accounts receivable side would be going down?

Receivables would be going the wrong direction first. They'll be going up as the measure of cash from operations and the reason is that the working capital burden -- excuse me, the receivables burden on a franchising business is greater, obviously, than the receivables burden on a restaurant operating business. As you're thinking about modeling our business over time, and we've expressed this in earlier guidance, for at least the period of time where we're refranchising units, we'll be building up a franchise royalty receivable, which will work against our cash from operations number.

What level would that be?

Yes, we haven't been specific in our guidance there. You can do the math. I think typically this system has, and I forget the receivables numbers that Applebee's, but I think maybe 45 days or so. I seem to recall 45 days. (multiple speakers) Just apply that to what you think the average unit will generate and multiply that by the number of units and you'll get there.

Okay. On the margins of Applebee's, the 150 to 200 basis points of improvement margin that you're talking about would include the additional marketing expenses and everything else that you're doing, correct?

There are no additional marketing expenses. It's the same number we've been using beforehand.

You're not going to have to do additional --?

No.

No. We'll do -- actually, thank you for asking that question. That's actually -- I should have probably said that beforehand. No. The marketing expenditures in terms of a percent of sales will stay the same. We believe we can better use that close to $200 million in the ad fund and some of the other aspects. No, we won't be adding any additional marking expenditures either. It isn't our intention on the franchise or company side. That was a good question. Sorry about that.

And on transaction expenses, can you just break out what the total was and how much exactly was paid in 2007?

$70 million remained of unpaid obligations that we have. Think about it as all related to investment banking fees.

Right. And then, but what was paid in 2007?

Amy, we're going to have to get back to you on that number. It doesn't come to mind clearly. We will get back to you on it. But we paid some investment banking fees, obviously a bunch of legal fees. But we need to get back to you with that number.

Right. Okay.

And maybe we'll file that as an 8-K, as well, after this call.

Okay. And then, last question, so you're selling 100 units, you're leasing -- doing the sale leaseback on 190. What does that leave left to do and what would you say the time frame of that is?

Well, the 190 units that we're selling in the sale leaseback means we're done. We won't be -- that's it. That's all the owned properties we have on the restaurant side. On the company operation side, we have approximately 509 company restaurants.

Selling for (multiple speakers)

We're selling all of them except for the one Kansas City market, so we'll be selling approximately 475 restaurants in total over the next three years to the -- we'll be refranchising 470 units, 100 of them will be selling this year approximately.

Right, so for planning purposes, assume we'll do half -- of the remaining 375 units, we'll do half in 2008 -- half in 2009 and half in 2010.

I think that's a good assumption.

Okay, okay, great. Thanks very much.

Thank you.

Okay.

Your next question comes from the line of Jeff Bronchick of RBC Investment Management. Please proceed.

RCB, but anyway, good morning everybody.

Hi, Jeff.

Good morning.

Now, a lot of confidence in everything you've laid out with one issue. I'm just wondering in this sort of an economic environment with your -- where your stores are located and your demographic of consumers, what really is giving you the confidence to come out and say we're going do our usual great comp store -- 2% to 3% at IHOP for the year here in the end of February?

Well, actually it was 2% to 4%, so I'm even more confident than you gave me credit for. I think the reason we have such high confidence is we've -- I think I've mentioned this on prior calls. We have tested all of the product promotions. They're done and in the can for 2008. The commercials are done, they've all been tested successfully, we have a very high confidence level, we have tremendous upside that we're planning. Don't want to give away all my secrets. But some pretty really cool and neat things for the 50th, which I am extremely excited about. The Record National Pancake Day in U.S. history. When I give you the numbers at the end of first quarter, you will be in awe. It's pretty amazing.

So we've got a lot of momentum built up in IHOP, and I think people, you know, love us more than ever. And I don't want to underestimate that the -- I think I mentioned this before. We now have all of our six promotions on network with the exception of one. And so I do think that helps us from just a sheer reach frequency. We really are sort of blasting the airwaves. So I think more than that, the branches have the momentum going that whether you're listening to our consumers through our consumer research or you're talking to the 1-800 line or listening to it, people really like what they're getting, the price value, the advertising. It's all working for us. You know, we said back in 2003, we were going to put all of these strategies together and when we really got them up and running it would be like magic. And I really do think that's what's finally happened. The ops has taken off, the advertising has taken off, the menu, the marketing. It's all really come together. And I think that's what gives us this incredible confidence in a tough year.

Tom, I'm going to take this up with you offline, but very simply getting back to the sale leaseback accounting?

Yes, Jeff.

Is it -- am I correct in understanding that these are accounting issues and in no way is IHOP retaining residual true equity interest in the sale leaseback to a franchisee?

That's a correct assumption to make.

Okay. Thank you.

Okay.

Your next question comes from the line of [Robert Gooch] of MAC Capital. Please proceed.

Hi, good morning.

Hey, Robert.

I just -- on question on the maintenance CapEx. I believe you guys were saying that in 2011 when you had just the Kansas City restaurants going that you planned on spending about $15 million and you're going to have hell of a lot more units in 2008. And I was wondering if you can explain to delta that can explain that. I'm still a little --.

Yes, we've made assumptions, Robert that we would this year engage in significant remodel activity. I think Julia's strategic decision is until we get brand positioning exactly where she wants to get it, that it doesn't make sense to invest heavily in significant remodel. And so our maintenance cap -- we've been -- so that was the big variable in the assumption between 2009 in our model and 2011, that we would be remodeling. But because again, because the positioning isn't where we want it, eventually it will get there and we may do some remodel, but our objective obviously is to keep the stores fresh and appealing to our customers and to be able to franchise those to franchisees. And when the positioning of the brand is agreed to by Julia and the franchisees that sort of remodel activity would follow. That's the big, that's the big reconciliation factor.

How many remodels were you planning in 2009?

I don't know what the number was, but I seem to remember the difference in our modeled -- in what we modeled for CapEx and what we're spending is around $30 million to $40 million.

Okay. On the refranchising, I think I -- unless I read your release wrong, you're doing about 100. That takes you down to 375 then split evenly in 2009 and 2010.

For modeling purposes -- it won't happen that way, but for model purposes it's the right way to do it.

I thought you said you were at least you were going to be doing 60 additional refranchisings in 2009 -- only 60.

We'll get commitments from franchisees. We'll sell 100 and then we'll have commit -- we'll be able -- we'll have the good fortune to announce commitments that there'll be at least 60 more committed units to be purchased by franchisees by the end of the year, which will move the 60 into 2009 and be part of that much bigger number of 150 to 200 units.

But by 2011, you plan to be all done?

By the end of 2010, we plan to be all done.

Right, and just one more question on the sale leaseback. I believe you said that if it were to be a sale, you would not recognize due to what you are carrying it on the books at, there would be no gain or loss?

Right. Because we're still within the purchase accounting period, we would just amend the assets on the purchase accounting and so there would be no gain or loss. Whatever the residual would be, would be adjusted to goodwill, I would imagine that.

Okay, so the net proceeds now that you put out in today's release would also be the gross proceeds number on both the center's sale, as well as the 100 units involved in the sale leaseback.

No, the numbers we gave are net of tax, ahead of the tax basis.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Mitch Speiser Telsey Advisory Corp Please proceed.

Thanks very much. Couple of questions. First on the G&A number, just want to make sure I got the reconciliation right. In the press release, I think the numbers for G&A add up to about $133 million to $142 million. In the prepared statement it's $186 million to $199 million. That difference is in what line item on the income statement?

Mitch, I'm not tracking you. Could you go slowly with that?

I'm sorry. In the press release, I believe the G&A numbers outlined were for IHOP $38 million to $42 million and then Applebee's $95 million to $100 million. So, I'm just adding those up. It comes to about $133 million to $142 million. And then, I believe in the prepared statements, I think G&A is expected to be $186 million to $199 million. So the difference is in (multiple speakers)

It's in the parent company. If you look in the press release, you have IHOP, you have Applebee's, and you have parent company, which amount -- that range amounts to $148 million, $170 million, $186 million to $199 million.

Okay. I'll recheck that, sorry. Next question, and you may have alluded to this -- maybe you might put out an 8-K later, but can you give any estimate on the EBITDA forecast for 2008?

No, not really. You know, we didn't -- that isn't the center that we'd like to guide to. We want to guide to this free cash flow number.

Okay, and I'm sure if you do gave us a D&A number, we could probably back into it.

No.

Okay. And moving along, any thoughts on the 2009 debt pay down range potential?

Well, you know, you can take the number of units that we're selling because that will be -- and everybody's going to model this thing differently. But if you look at the number of units -- if you look at the number of units that we're planning on selling, say it's between 150 and 200 units and you add -- assume about $1 million or so a unit, you'll assume that until we get to six times adjusted debt to EBITDAR, that I'm going to have to use all of those proceeds to pay down the funded debt. So, the number -- I guess the long-winded answer to your question is it's somewhere between $150 million to $200 million.

Okay, because you are generating some decent cash flow internally, so should we think about that money then not going to debt pay down or --?

Yes, I think -- well, I have an obligation in the securitization to use every dollar from that disposition to pay down funded debt until we get to six times. You know we have this preferred piece of equity that's out there. And so, I'd rather pay 7% pretax than 10% after tax. So my objective would be to use asset proceeds to pay down the funded debt and then, whatever excess cash flow that we use, after considering CapEx and all these other things. You know, we probably want to pay down that piece of preferred equity pretty quickly.

Got it, thank you. My last question is just on wheat costs. I'm just wondering how that has affected your cost structure at all at IHOP and for the company in general.

Well, at IHOP, you should know I got this question the other day. The pricing model we have with the franchisees is organized in such a way that as wheat costs go up, the company passes on a portion of that cost to the franchisee in the form of higher pricing on the dry mix. And so it won't have a material impact on our financial statement, because we are not an operating business.

But I will tell you that at IHOP, we are going to see in 2008 increases in coffee, oil, and juice, but they are completely offset by contracts we've set up on beef, chicken, and pork. So it's basically almost a flat year. I think we're projecting a 0.23% increase. But for the most part, I think I really want to give credit here where it's due. The franchisees working with the team here at IHOP did a terrific job of literally putting together a process such that we could eliminate almost all increases in 2008 from a commodity standpoint. Tom is right on the wheat piece, but in general we've done a good job of having some increases, but really negating them with some contractual obligations.

Okay. Thank you.

You're welcome.

Your next question comes from the line of [Doug Pardon] of Brigade Capital. Please proceed.

Hi. Good afternoon. My question is with regards to the sale leaseback. You guys said you were in second round bids. I'm curious to -- what the nature of any financing conditions are to any of those bids, just given that the CMBS market is essentially shut and all the turmoil in the credit markets.

Yes, we're not going to disclose the details of that, Doug. All I would say about the process is, there is a wide range of interested parties, some of which are dependent on certain types of financing and others aren't. So, we're not going to speak to the details of any specific bids.

Okay, and then just as it relates to that, is there any -- in terms of selling the company-owned units, is there any order that has to happen first, given rent payments that the sale leaseback transaction has to close before you can sell company-owned restaurants?

No, there is none.

There isn't.

Okay. Great. Thanks.

Thank you.

Your next question comes from the line of Bryan Elliott of Raymond James. Please proceed.

Thank you. Did I hear the margin -- Applebee's margin commentary correctly? You took 3% of price in January at the company stores. You're not sure what the carry over was from 2007 price increases, is that right?

That's correct, Bryan.

Alright, and I can figure that out. I think they disclosed that. The 150 to 200 bips of company-store margin that you assumed in your model, there was some discussion about the franchisees doing things differently, et cetera -- operating like franchisees. Is it correct to infer from that that company store margins here are a couple hundred bips below franchisee margins?

I don't think, we're not going to make that different, we don't have enough visibility into the profit of franchisees. What Julia's suggesting is that we have 150 to 200 basis points of improvement that we believe we have a plan in place to make. So Bryan, I won't go there because I haven't seen franchisee financial statements. But Julie, you may have a perspective on it.

Yes. I think in general, the franchisees are probably doing a better job at the operating line than company stores.

But we're not sure of them, right?

But you can directionally, I think Bryan's right. I think the specifics we need to get back to you on.

Right, but the company store sales are substantially below the franchisee sales. So, I guess did -- what you're saying is that if we operate them with the same procedures and incentive systems and simplicity that 200 bips of costs fall out of the company stores independent of any same-store sales changes, maybe that's really my question.

But that also if we take certain initiatives, pricing being one of them and other types of initiatives, as well to improve everyone's profitability -- not only ours, but the franchisees, so we can get to that number.

Right, it's both, Bryan.

Okay. Alright. Also, Julia, you alluded to the strength of business at IHOP so far this quarter, which obviously is the huge outlier relative to pretty much everybody else in the business. And you haven't had a chance to test a lot of things whatever at Applebee's yet. Can you give us some sense of where that business, which has been underperforming peers for some time, might stand quarter to date?

I think you can take my enthusiasm at IHOP and you can bring that same enthusiasm to Applebee's.

Fair enough.

We're pretty happy with what we see so far, Bryan.

Okay. Great, thanks.

Your next question comes from the line of Mike Smith of Kansas City Capital. Please proceed.

Good morning.

Good morning, Mike.

Hey, Mike.

Couple of questions for you, kind of going back to the discussion that you had with Mitch on G&A. It appears to me that you've identified maybe $30 million in savings from Applebee's so far, Julia, or are you just moving that to a new camp that's called the parent?

No, we've said over the next couple of years, three years to be exact, we think we can get at least $50 million worth of saves out of the G&A of Applebee's. The large majority of that is associated with the sale of company restaurants. And as we sell company restaurants, we take certain people off the payroll. We've been very public about that $50 million from 2008 to 2010.

Correct. Mike, what you're seeing a little in comparison to Applebee's, Mike, is that they had a bunch of one time costs last year associated with strategic alternatives that we're not going to take credit for. If you want to give us credit, we'll take it. But we're not going to really take it. It's just a fallout of expenses that just aren't going to happen again this year. But what we will say about G&A is we're ahead -- as we've said about CapEx and others. We're ahead of what we modeled when we made the decision to buy Applebee's, on our G&A management.

And Jeff, one other question on your -- you indicated interest costs this year would be around $190 million.

Yes.

Okay. I just wanted to make sure I wrote that.

You know, I heard that one, it was funny.

Alright, Mike, we got it. We got it.

And what is actually the dividend on the preferred? I should know this but I don't.

We have two pieces of preferred on the big piece, which is around $190 million. It's 10%. I think after two years or so, it goes to 12%. And on the convertible preferred, which is the $35 million piece, it's a 6% dividend tick, so there's no cash applied, just an accumulation, whatever the right terminology is, but an accretion of value over time.

Why do I always see $187 million -- or no, I'm sorry.

We had to pay an up-front, I think it's called an issuance fee, of a certain percentage. So that was deducted from the 190.

Okay. Let's see. One other question. You already answered that one. Thank you very much.

Alright, Mike. Thank you.

Your next question comes from the line of Michael Christodolou of Inwood Capital. Please proceed.

Yes, Julia, a couple questions on Applebee's. First, could you talk about the first category would be the store managers at the company-owned stores. What can you tell us there about turnover and any change to the compensation plan to allow these managers to motivate them to pick that low-hanging fruit? And have you given them any retention bonuses to keep them on board while they deal with the uncertainty of does my store get sold and do I have a job and the same kind of health benefits when I'm working for a franchisee owner? Second, question if I could and then I can drop off. You mentioned you're hearing a very positive reception from franchisees. What are you hearing from the franchisee finance sources? It seems like there's a lot properties coming to market from Brinker's and Wendy's others and the credit contraction that's out there and I understand recently Merrill Lynch has excited the franchisee finance business -- sold it to GE. So now there's just really three lenders out there, GE, Wells Fargo, and B of A and they've all got tighter credit and a lot of properties out there and I was just wondering if you could talk us through your confidence factor on the funding side for your franchisees.

Okay, great question. So the first question about the general managers, I'm very proud to report to you that yes, we put a very strong stay bonus plan in place for all of the general managers at Applebee's and we have lost virtually no one in the field, which really bespeaks three things. Most importantly a fabulous culture. Secondarily a great brand and thirdly, I think the reality that everyone is sitting out there saying, look when I'm sold I'll simply go to work with the franchisees, I want to stay with the great brand that is Applebee's. So, I'm proud to tell that you that program, that stay on bonus program, they actually get that bonus when literally they are sold and they are going to work for the franchisees is working. We just haven't had any exodus from the field and I think that bespeaks a lot to the brand and to the management and the program we put in place. I'm glad you asked that question. That's going very well.

I'll give my top line report from the franchisees I've spoken to at Applebee's and certainly Tom can follow it up. But the Applebee's franchisees have said to me, look, there are plenty of sources of capital whether that's in private equity, regional banks, places they have been looking previously when they've taken out loans or they've refied or the like. So, they have not said to me there is this panic in terms of getting money for making an acquisition of Applebee's restaurants. You may have some more specifics.

The only other thing -- I -- Julia makes the right point, which is we have guys of substantial means in the system. It's likely that the buyers are going to be people who will have access to capital. There is no question, though, Michael, as we all can read in the paper and see by talking to that community that credit conditions are tightening up a bit. But that doesn't mean there's an absence of credit available for acquisitions and given the profile of our likely buyers, either within the system or people who bring in the system, they will have access to capital.

Thank you very much.

Your next question comes from the line of Steven Rees of J.P. Morgan. Please proceed.

Hi, thanks Tom. Just quickly on the interest expense, how do you expect that to trend overtime as you pay down the debt? I mean, are you paying down higher rate portions or lower rate portions? And do you expect it to trend down over time?

The only piece of debt we have, Steven, that is notably higher than others is the subpiece and there are partial amortization requirements that start, I think in 2009. You know, that basis point differential is probably a couple hundred basis points. Other than that, we do have a six-month piece of debt that we will pay down when the time is right and that's priced a little higher than the five-year debt that we have. But we're talking about a number of basis points. Where not talking a big difference. So, the initial 350 will come down and then we'll be paying down Applebee's debt, not IHOP debt, because the assets we sell are within the Applebee's securitization and therefore, there is a real distinction between Applebee's and IHOP debt and so we'll be using that to pay down probably the Applebee's unwrapped debt because some of the debt is wrapped by a bond insurer and others aren't. But there again, there are not material differences in the basis point. So we don't have to worry about that so much.

Beyond the subdebt, there really isn't a big concern. It's going to be Applebee's debt and it's all priced about the same.

Okay. And then, just on the franchising segment, it looked like we got the revenues from the Applebee's franchise streams in the fourth quarter, but on the expense side it looked relatively consistent with what you had reported under IHOP.

Yes, the Applebee's doesn't have a lot that they classify as -- and you should read our K when it comes out. I'm sure you will. There isn't a lot of expense that they apply to the franchisee segment, unlike IHOP, which reflects advertising expenses in the franchising segment, which reflects our proprietary dry mix costs. Those are the two biggest segments that are absent from the Applebee's franchise operation segment.

And that's in their G&A?

They don't have dry mix and their advertising doesn't get captured on their P&L. It's just a balance sheet issue.

Okay. But should we expect a step up in expenses, you know, greater than what we saw in the fourth quarter?

Not materially.

Okay, not materially.

Not within the franchise operation segment.

Okay. Thank you.

Your final question comes from the line of Majid Khan of Cobalt Capital. Please proceed.

Hi. I apologize if I missed this. Did you say what the interest expense on the capital lease part of the sale and leaseback deal is going to be?

We didn't. We know what the gross proceeds will be. There's a way to get at that number, but I don't think -- we haven't provided any specifics but I'm sorry, I didn't get your name. Is your name Michael?

Majid.

Majid, I'm sorry. Majid, you'll just have to assume a reasonable cap rate equivalent and we haven't got it on cap rates, but you guys can make a call into that market and apply that over gross proceeds and you'll come up with a number.

Well, maybe -- let me ask it this way. When you're doing the deal or when you're thinking about doing the deal, you'll use the after-tax proceeds to pay down debt that's costing you 8.5%. Is the transaction going to be accretive to free cash flow?

It's going to be relatively consistent, so there won't be an accretion or dilution in free cash flow. It's about the same.

Okay. And how about for the 100 stores that you're selling? It'll reduce your earnings, but add back franchise fees?

That's correct.

But you'll use the proceeds to pay down debt?

That's correct.

What's the free cash flow impact of that?

Well, the free cash flow impact, that's a hard question for me to answer because you're moving out of a CapEx related business into one that doesn't require CapEx, right?

Right.

So that's an improvement.

Well, that's an improvement on returns but I'm wondering.

It's an improvement on our definition of free cash flow, which is cash from ops, less CapEx. And then obviously, we're going to be selling more EBITDA than we're going to be generating in royalty income. However, what complicates my answer, and I'm not trying to avoid answering your question, is the economic payoff takes place when you reduce debt and when you significantly reduce G&A. And so, we believe that when the process of transformation is completed and all the units are sold, what will happen is we'll be in a better cash from operations and free cash flow position because of things that are not directly, but are indirectly related to the decision to get out of the company operations business, which are reduced G&A burden, reduced CapEx, and reduced interest expense.

Got it. It will over time have a free cash flow impact.

In a positive cash flow impact, correct. Free cash flow impact, just so we're using the right terminology, right?

Right.

Because we're out of the CapEx business when we go into an intellectual property business.

Exactly, okay. And in terms of Applebee's, did you lay out how you're going to get to the 1% to 2% same-store sales growth number like for the things that you're going to do with IHOP. Is there something similar?

Yes. You may have missed that. The short version is just very much the same in re-energizing the brand and improving operations. A focus on new advertising, which starts Monday, a new consumer target, focus on the menu, focus on improved operations, some real basic heavy lifting, but that we have a high comfort level and that the franchisees and the associates of Applebee's are very focused and supportive of.

Julia, is this, given the economic backdrop and a lot of your competitors aren't doing very well, especially in the buy and grow category, is this mostly going to be taking customers from somewhere else or an increase in the check when people do come in or an increase in traffic?

I would argue all of the above. It's taking from independents, which as you know, the large majority of the category is independents. It's not chains. So, I would say it's taking from independents, it's taking from chains, but it's also increasing the frequency of our existing guests to come more often. So it's all of the above. As I always like to say, I'll take it from any and all. But I do believe it's absolutely doable and plausible because the brand is a terrific brand.

We would never have bought the concept if it was a dying brand. This is a fabulous brand with lots of upside. And I think the re-engineering that we're talking about and the re-energizing is exactly what it needs.

Got it. And I just wanted to make sure that I heard this correctly. You've hedged out your chicken and beef exposure for 2008?

At IHOP, at IHOP. Not at Applebee's. But at IHOP we absolutely are only predicting a 0.23% increase in commodities, because the large majority we were able to take care of with some of the oil increases and coffee and O.J. offset by pork, chicken, and the like.

Got it. For Applebee's, it's only your company-owned stores that you have full exposure to chicken and beef prices?

At Applebee's, it's a different set of contracts and a different set of timing. They have different issues. In other words, their contractual work that they did in commodities and in the actual procurement is different so that question was not asked earlier. At Applebee's, we've been able - - we certainly have some favorable positions in dairy and oil and they were unfavorable prior years. But the overall projection looked like a slight increase over 2007 at Applebee's. You know, the one thing that I wanted to remind you about at IHOP, when I make those kinds -- and I've done this historically -- forecasts about commodity increases, remember, we only have 10 company stores at IHOP, so the impact, there is no impact. It's only -- we do extra work for our franchisees because we care about the middle of their P&L and it's important for us that they make money.

But when I make those kind of statements about commodity increases or the work we're doing, it's all around the franchisees. There is no impact at IHOP. There will be some at Applebee's this year which we're working very hard to offset in our company stores, thus the need to be a franchise business.

Fair enough and just last question, what is the tax on your store sales? I'm just trying to figure out what franchisees are paying for the stores.

What's our tax?

The $100 million number you gave was after tax, right?

After tax.

So I'm just wondering what the tax number is, so I can figure out what franchisees are paying.

It's going to differ store to store, so we won't provide that level of -- disclosure on this, Majid.

Okay. Is it easier -- are these the better stores that are being sold or is this going to be the average price for all the stores sold?

These are not necessarily the best stores we have in the system or the -- I mean, it's really is -- go ahead, Julia.

That's why we've said all along, there's a fair amount of variability this year. That's why we tried to guide accordingly, because you really are -- there is no such thing as average. That's why it's going to be a bit difficult.

Right.

We really, there's no -- it could be one market one day and another market. There could be leases, there could not. There's a lot of variability here. That's why it's hard to -- and we really aren't trying to be short shrift you of information. It just really is fairly variable.

Got it.

In other words there's not a strategy that says I've got to sell the worst ones first or the best ones. It really is all about working with our potential buyers and figuring out what makes sense. So that's why we've had difficulty in projecting other than to say we absolutely are committed to selling 100 this year.

Okay. Perfect. Thank you very much, guys.

Thank you.

Thank you, Majid.

Ladies and gentlemen this concludes our Q&A portion of the conference. I'd like to turn the presentation back over to miss Julia Stewart for closing remarks.

Angelique, thanks. You were terrific. As always if you have any further questions, please feel free to call us. We're always here. I think, most of you know that Tom and I and Stacy and the rest of the team would very much welcome your phone calls. Our next call will be, on the first quarter 2008 results, will be April 23, and it is our intention to file the 10-K within the next business day. So thanks again for all your questions. Look forward to talking to you soon.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a great day.