Dine Brands Global Inc (DIN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 IHOP earnings conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Stacy Roughan. Please proceed, ma'am.

Good morning, and thank you for participating on IHOP's first quarter 2008 conference call. Today with us from management are Julia Stewart, Chairman and CEO, and Tom Conforti, CFO.

Before I turn the call over to Julia and Tom, let me remind you of our Safe Harbor regarding forward-looking information. Today, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause 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-K filings with the Securities and Exchange Commission. In addition, IHOP disclaims any intent or obligation to update these forward-looking statements.

On this call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news release today, which is available on our website at www.ihop.com.

Now I'd like to turn the call over to Julia Stewart.

Thanks, Stacy, and good morning, everyone. As you should have had an opportunity to review this morning's news release, Tom and I will keep our comments directed towards additional financial performance detail for the IHOP and Applebee's business units, as well as provide you with an update on our strategic agenda for our brands. So let's get started.

Looking at the IHOP business units, we were pleased to report IHOP's 21st consecutive quarter of system-wide same store sales growth for the first quarter 2008. The combination of IHOP's successful limited time offers, All You Can Eat Pancakes and shortcake pancakes, along with a record-breaking National Pancake Day and our promotional tie-in with the animated film Horton Hears a Who, produced a strong 3.7% increase in system-wide same store sales growth during the quarter.

Traffic results for the IHOP system were flat, in contrast to the negative traffic trends we experienced throughout 2007. Our positive sales performance also reflected the benefit of a timing mismatch related to the Easter holiday, which contributed approximately 0.5 of a percentage point to sales growth in the first quarter 2008.

Now, our efforts to energize the IHOP brand will continue throughout the year, supported by a terrific marketing calendar. I think as most of you know, IHOP is celebrating its 50th birthday this year. And as we move into the summer, we have exciting limited time offers and other special events and promotional opportunities related to celebrating our 50th.

Looking at our strategy to improve operations, IHOP's Operations team has a comprehensive plan to materially improve our system's operational execution throughout 2008. From ensuring that we flawlessly execute the marketing calendar to better leveraging information technology, and optimizing our menu strategy, we are dedicated towards driving a higher level of sales and profitability at franchised IHOP restaurants this year. We held a successful round of regional business conferences in March and April, where we shared our operational plan with franchisees and established clear goals around how we will raise the bar even further in 2008. Now we are moving forward, aligned as a system, ready to execute significant and achievable improvements that should have a positive impact on the guest experience at IHOP restaurants nationwide.

Finally, consistent with our strategy of maximizing franchise development, franchisees opened 11 new IHOP restaurants in the first quarter. We ended the quarter with a strong development pipeline, which included a total of 465 committed, pending, or optioned IHOP restaurants that are expected to be open over the next several years. Franchise restaurant expansion will remain an integral growth factor for the IHOP business unit for some years to come.

We couldn't be more pleased with IHOP's performance for the quarter. It's a terrific way to kick off 2008 and IHOP's 50th birthday celebration. We look to continue our momentum as we execute against IHOP's marketing, operation, and franchise development plans throughout the balance of the year.

Now, turning to the Applebee's business unit. We have made solid progress in the first quarter 2008 with our strategic agenda to re-energize the Applebee's brand, improve the operations execution of the system, and enhance the profitability of company-operated restaurants.

I'm pleased to say that on our first quarter of owning Applebee's, we delivered positive system-wide same store sales growth, which the brand had not experienced for two years. For the first quarter 2008, domestic system-wide same-store sales grew 0.5%, primarily due to pricing increases taken at the company-operated restaurants, and a strong performance of our national gift card program.

Same store sales growth at company-operated Applebee's for the quarter was 2.1%, which we achieved through higher guest check averages and negative traffic performance. Factors driving guest check averages higher included effective pricing of approximately 3%; a favorable mix shift to higher priced items; sales contests at company-operated restaurants; and an approximate 0.7% contribution from gift card redemption. This was offset by an unfavorable Easter holiday comparison to 2007, which reduced Company restaurant same store sales growth by approximately 0.6%.

Now, for the first quarter of 2008, domestic franchise same store sales were flat. This compares favorably to the past seven quarters worth of negative same-store sales trends at domestic franchise Applebee's restaurants.

Now in March, we introduced Applebee's new advertising campaign -- It's A Whole New Neighborhood. The ads aggressively reinforce Applebee's position as the leader in grill and bar segments, and our message is clearly focused on classic grill and bar food that you can only get at Applebee's. Initial testing indicates that the campaign is resonating well. Our new ad campaign also features real people having a great time at Applebee's.

In the next set of ads, beginning May 5, we will encourage Applebee's guests to submit their own videos taken inside our restaurant, and will selects submissions for youth in upcoming commercials. It's a terrific way to celebrate the connection we have with our guests.

And during the first quarter, we've solidified a new brand positioning for Applebee's, reflecting the vision for the brand and the filter through which all of our marketing efforts will be vetted. We also refined our customer targets during the quarter. Historically, I believe Applebee's has not been aligned with the right target. We often overshot the brand in the pursuit of a more upscale customer, while, frankly, failing to deliver on the expectations of our core users. By refocusing on core users and strategically augmenting our customer targets, our goal is to drive growth by re-engaging last users, attracting new users, and increase frequency.

Now, in terms of evolving our menu, our strategy must differentiate to attract these guests. I believe the casual dining category is suffering from a sea of sameness. Most players in the space are at parity with one another, Applebee's included. Our opportunity lies in creating craveable food with unique flavors and combinations you can only get at Applebee's. Signatures grill and bar items, such as appetizers, burgers, salads, steaks, as well as beer, wine, and other specialty drinks are the key to differentiating Applebee's from the competitive set, while remaining true to our brand positioning.

The restaurant level execution of our menu is also critical, serving hot food hot and cold food cold. To deliver this, we expect to rationalize the size of the menu over time, focus on training, and evaluate the back of the house to determine how we can update the kitchen equipment to improve our execution and support exciting new menu platforms.

Finally, I'm proud to say that we've completed a full marketing plan for the balance of 2008, and have developed a roadmap for all of 2009 that should be finalized in the next couple of months. We are also taking a very close look at brand platforms, such as car-side to-go and Weight Watchers, as we believe there's a clear opportunity to improve and optimize these programs.

Now, looking at operations, our strategy to improve operations execution at Applebee's restaurants system-wide is taking shape. An operations rating system, similar to the one we use here at IHOP, is currently under development. We plan to implement the program over the summer, and expect franchise and Company operator ratings to be available at the end of the third quarter 2008.

Now turning to Company restaurant operations. As you know, Applebee's margin performance declined throughout 2007, prior to our acquisition of the Company, ending 2007 with a full year margin of 10.7% before transition costs. Our plans for 2008 is to increase Company margins by approximately 150 to 200 basis points on a full year basis. We saw initial traction from our 90-day action plan to improve profitability, particularly in management of hourly labor, waste in comps and discounts in the first quarter 2008. In the first three months of this year, we produced an operating margin of 12.1% before transition costs and pre-opening expense at company-operated Applebee's restaurants.

Pricing taken during the quarter improved top line contribution to margin, while per unit rates on food costs and management labor expenses were negative to margins year-over-year. The result was a 70 basis point decline in margin versus the first quarter 2007, excluding transition costs. However, these results reflect the inclusion of a manager's bonus program, which contributed to the decline. We have now amended this program going forward. This change, along with the overall plan instituted by our Operations team, should lead to improved margin performance as we move forward.

I would like to personally thank our Operations team and the restaurant operators. They've taken enthusiastic ownership of the improvement plan, and are driving toward the aggressive goals we've challenged them with. With their leadership and support, we believe there is more upside to come as we look to drag efficiencies and optimally manage our business throughout 2008.

Now, before I turn the call over to Tom, I would like to update you on the status of our sale leaseback efforts and the progress we've made in franchising company-operated Applebee's restaurants. And while we are continuing negotiations with several parties to complete a significant sale leaseback transaction by the end of the second quarter 2008, a transaction of this type has been challenging, due to weakened credit market conditions.

As we continue negotiations, we will determine if the deal terms available are in the best economic interests of the Company as we move forward. At this point, our preference is to complete a single, large sale leaseback transaction, and pay down the associated funded debt, although we believe that there are viable economic alternatives to a single large transaction. Tom will address our thinking during his comments.

Now, in terms of Applebee's headquarters, we've signed an asset purchase agreement for our Restaurant Support Center in Lenexa, Kansas, and now expect the deal closing on or before June 1, 2008. The sale of the Restaurant Support Center is expected to generate after tax cash proceeds of approximately $40 million. The use of proceeds from this transaction will be dedicated toward unpaid transaction-related expenses from the acquisition, as well as the pay-down of some of our funded debt.

Turning to our re-franchising efforts, on March 19, we reached agreement with Apple American Group, our single largest franchisee at Applebee's with 145 current restaurants. Now, they will make the sale of 41 company-operated restaurants located in Southern California and Nevada. This initial agreement met our targeted multiples and we believe represents a clear vote of confidence in our plans to revitalize the Applebee's brand from our largest franchisee. Currently, we are in negotiations with a number of prospective franchisees for the sale of additional markets sometime in 2008. And we'll keep you updated throughout the year.

Now, I'd like to turn the call over to our CFO, Tom Conforti.

Thanks, Julia. Today I'd like to quickly walk through the key contributors to our financial results for the first quarter 2008. As a reminder, our performance includes a full quarter's worth of Applebee's operating results in 2008 versus IHOP's stand-alone results in 2007. Therefore, our year-to-year comparisons will show sizable variances.

Starting with earnings, we reported a 20.6% decrease in net income available to common shareholders, to $0.50 per diluted share for the first quarter 2008. The decrease was primarily due to a $48.4 million increase in interest expense related to the financing of the Applebee's acquisition; a $31.5 million increase in G&A expense due to a full quarter's recognition of Applebee's G&A expenses; and $5.3 million in dividends on preferred stock and accretion on our convertible preferred stock.

These factors, which were partially offset during the first quarter 2008 by the strong performance of our core franchising business, which produced a $40.7 million increase in franchise operations profitability, due to a full quarter's recognition of Applebee's franchise operations profit, and an excellent 12.5% increase in IHOP franchise operations profit.

Looking at income taxes, our quarterly performance benefited from a lower effective tax rate of 9.9%, compared to 36.9% in the first quarter last year. Our effective tax rate during the first quarter 2008 reflects the benefit of compensation-related tax credits associated with Applebee's company-owned restaurant operations and lower overall consolidated profit.

Now, turning to a review of our segment performance, let's begin with our core business franchise operations. Consolidated franchise operations profit grew to $66.6 million, reflecting the inclusion of Applebee's results for the first full quarter of 2008. Additionally, the IHOP business unit generated $29.1 million of franchise operations profit, due to an increase in IHOP franchise retail sales. This increase in sales was primarily attributable to the 4.2% increase in effective IHOP franchise restaurants, and a stellar 3.7% increase in same store sales for IHOP franchise restaurants during the first quarter of 2008.

Looking at rental operations -- which really only applies to the IHOP business unit -- rental operations profit decreased by a modest $173,000 or 2.1%, to $8.3 million for the first quarter 2008.

In financing operations, financing operations profit decreased, as expected, by 17.5% to $4.6 million in the first quarter 2008, primarily reflecting the decrease in franchise and equipment note interest related to IHOP's old business model. This was primarily due to the reduction in franchise fee and equipment note balances, as IHOP franchisees paid down their note obligations. Additional cost and re-franchising six IHOP restaurants compared to two restaurants in the same period last year, also had an impact on financing operations profitability.

Finally, turning to Company operations, Company operations profitability increased to $35.4 million, due to the inclusion of Applebee's company-operated restaurants for the first quarter of 2008. Total Company restaurant sales increased to $311.9 million in the first quarter 2008. The increase in total Company restaurant sales was due almost exclusively to the Applebee's acquisition, which contributed $308 million of the increase.

Now, looking a little closer at Applebee's Company margins -- price increases improved margins significantly from the first quarter last year. Food costs, rate increases, degraded margin, due in part to increases in commodity costs and mix shift, as guests selected higher food cost items. Contributing to improved margins was good management of inventory, which reduced the impact of waste. And additionally, hourly labor improved as a results of good wage rate control and management of hourly productivity. Management labor was unfavorable, due to increased participation and payout rate of the field management bonus program. Now, as Julia mentioned, a new program has been rolled out to increase alignment of bonus payment with positive cash flow performance.

Looking quickly at commodities, our outlook on commodity prices for 2008 has not changed. We expect increases in commodity costs for Applebee's company-operated restaurants of approximately 2.5% to 3% for the year or approximately 80 basis points of increased food costs for the full year. Cost increases have been tempered, due to hedging strategies on items that make up a significant part of the Applebee's system spend, including key diary items and items utilizing soybean oil.

We will seek to mitigate commodity costs through increased pricing as well as menu and plate optimization strategies. At IHOP, due to our highly franchised business model, the impact of rising commodity costs has little to no effect on our financial results for the IHOP business unit.

Turning to general and administrative expenses, consolidated G&A increased to $47.6 million in the first quarter 2008, primarily due to the inclusion of a full quarter's worth of Applebee's. Consolidated G&A included $3.1 million in non-cash stock compensation expense for the quarter. Applebee's G&A for the quarter totaled $25.3 million, including $2.7 million in transition costs. IHOP's G&A spending for the first quarter 2008 totaled $10.4 million, which included $2.4 million of conference expense and discretionary spending related to our Mystery Shop program as well as food safety and information reporting initiatives.

Corporate G&A amounted to $11.9 million for the first quarter of 2008, of which $7.6 million was related to compensation and related benefits. We are pleased with our G&A performance for the first three months of 2008, and we remain on track to meet or exceed our consolidated full year guidance for 2008.

Looking at interest expense for the quarter, we recognized a $48.4 million increase in interest expense to $50.6 million, as the result of higher levels of debt associated with securitization financing to fund the acquisition of Applebee's. Now, approximately $9.2 million of that was non-cash amortization expense.

Turning to cash flow, cash flows from operating activities decreased 37% for the first three months of 2008 to $10 million, compared with $15.8 million in the same period last year. This decrease was the result of a $32.1 million decrease in deferred revenues, primarily due to the redemption of Applebee's gift cards, as well as a $24 million decrease in overall payables for the quarter. This was partially offset by a decrease in Accounts Receivable related to gift cards.

As you may be aware, there is a large build-up of gift cards in the fourth quarter of 2007, which were then subsequently redeemed in the first quarter of 2008. We expect to see less volatility with regard to gift cards and its impact on cash flow in the second and third quarters of this year, and then would expect a significant build-up again in the fourth quarter of 2008.

Payables decreased in the quarter, primarily due to higher balances at year-end related to advertising vendors and the one-time impact on payables resulting from the securitization.

Our cash position for the quarter was augmented by $4.2 million worth of principal receipts from notes and equipment contracts receivable, which are an additional source of cash generation from the IHOP business unit.

Capital expenditures increased to $18.1 million for the first three months of 2008, compared with $784,000 for IHOP's stand-alone capital investment activities in the same period last year. The increase in CapEx reflects the inclusion of Applebee's capital investment primarily related to Applebee's Restaurant Support Center and the development and maintenance of Applebee's company-operated restaurants. IHOP's CapEx for the quarter was $322,000.

Now, I'd like to quickly touch upon our 2008 guidance. As you see in today's news release, we have reiterated most of our key performance expectations for the year. We modified our consolidated cash from operations expectations to range between $105 million and $110 million, and our consolidated CapEx guidance to range between $30 million and $34 million. Now, this change is due to reclassification of expenditures, from consolidated cash from operating activities to consolidated CapEx of approximately $8 million. And this expense was associated with the final construction costs of Applebee's newly developed Restaurant Support Center.

Additionally, we are updating our depreciation and amortization guidance to range between $115 million and $125 million in fiscal 2008. This compares to our previous depreciation and amortization expectations of $130 million to $140 million. This adjustment reflects a change due to purchase price accounting update, primarily related to extending the depreciable lives of some of our tangible assets.

Now, before I turn the call back to Julia, I want to provide you with some additional perspective on our planned sale leaseback of Applebee's 191 company-operated restaurant locations. As you may recall, we structured our debt for the purchase of Applebee's to allow for $350 million worth of make whole-free debt, which was sized to reflect the expected proceeds from its single sale leaseback transaction. Should we not be able to complete that transaction, the debt would simply roll into a five-year maturity, and any pay-down of that debt would require a make whole.

The specific economic trade off we are evaluating is whether economically it is to our advantage to complete a single large wholesale transaction with less advantageous cap rates or break the transaction into a number of smaller retail transactions over time with materially advantageous cap rates, offsetting the payment of a make whole to the noteholders.

Now, at this point, we really are in a position of economic indifference between the two alternatives. I would also point out that our ability to deleverage our balance sheet would not be impacted by either alternative. As our ability to delever is determined by the pace of franchising Applebee's company-operated restaurants, which might in fact be enhanced by the inclusion of real estate in any franchising transaction.

Now, whether we complete a significant sale leaseback transaction in the allotted time or not, we expect to pay down some of the short-term debt through a portion of our already-announced franchising efforts and the sale leaseback of Applebee's headquarters. Either way, it would be our intention that the path that we ultimately determine is optimal, for the disposition of Applebee's restaurant real estate, could mitigate the potential increased debt expense, by generating proceeds sufficient enough to offset the cost of the make whole. I hope that makes sense.

Now I'd like to turn the call back to Julia.

Thanks, Tom. I hope our overview of the business this morning has been helpful. Now, as a reminder, and as we've discussed previously, it will be difficult to predict some of our performance drivers in 2008. And we caution investors about the high degree of variability in our financial results, particularly from quarter-to-quarter.

This is primarily because of the significant transactions we're contemplating around impact and timing of franchising within the Applebee's business and the ultimate outcome of our sale leaseback process. As we've shared on our last investor call, the focus for this year and for years to come is free cash flow performance. This is how we will look at the business and encourage investors to do the same.

Now, Tom and I would be pleased answer any questions you might have. Operator?

(OPERATOR INSTRUCTIONS). Rachael Rothman, Merrill Lynch.

Just a couple of questions for you. First, on the sale leaseback, what can you tell us about what the make whole provision actually is? And if there's any step-up in the effective interest rate that you would have to pay above and beyond the make whole?

Yes. No step-up in interest, Rachael. And the make whole basically -- and we'll get you -- I think we'll do an 8-K so that people can read it precisely -- but it largely is just the present value of interest payments on the debt that gets rolled out from a seven-month term to a five-year term.

And as I've mentioned in my comments, we structured that way upfront to have some optionality that we could have some additional make whole-free payment. And so this is simply going to roll into our five-year maturity. And we will have a make whole on it that is the present value of future payments -- if we're not able to get it done in the timeframe that we've set.

So I guess in the 8-K, will you give us a sense for if that's $15 million or $50 million?

It depends on the time, right. In a strange sort of way, the longer we hold it, the lower the make whole payment is, right? Because it really is, in a sense, a payment against expected interest payments on the part of the noteholder. So, the longer we hold the debt, the lower the make whole is. And I don't want to throw numbers out, but it's a pretty significant change over the three year period of time.

I'm sorry, over the three year?

Yes, it's a five-year note, but the make whole -- and it's complicated by the terms of the indenture; you'll see it all, but there is a make whole for the first three years after that, it isn't the case.

Okay, but basically there's no cash out of pocket until you pay it off and then you'll owe them the net present value of the interest expense that they should have expected over three of the five years?

Yes. That's largely it. We will be making an 8-K so that readers can see it specifically, what the charges are, and there is no payment until we actually pay down the debt.

Okay. And then can you talk a little bit about -- I guess back in February, you guys were still pretty confident that this would get done at the targeted proceeds. And I guess to a certain extent, what you're saying is it could get done; you're just not sure -- that you're economically indifferent between going with the one large transaction or more retail transactions?

Can you talk maybe a little bit about what surprised you and how much conviction you have in your ability to hit the re-franchising targets, now that you've seen the deterioration in the credit markets? Or how can you give people comfort that if you may miss on this, that you're not going to miss on that?

How about I answer the second part of the question and we'll let Tom answer the first part. The second part is on the refranchising. I am very confident. We have been working with several franchisees, both within the Applebee's system and outside the Applebee's system, and I have a very high confidence that we will not have any issue selling the minimum or more of the 100 restaurants that we've talked about. So, let me put that at ease.

Yes, the credit market is difficult, but franchisees have lots of ways to get access to capital. So, I am not at all concerned. I have a very high confidence there, so. I'll speak to the second part and maybe Tom can talk a little bit more about the --

So Rachael, your question is kind of what happened?

Yes, just what changed between February and now? I guess we've all been worried about the credit markets going as far back as July.

Yes, you know, and I think when we addressed the issue previously, I think we were getting second-round bids. And what we noticed in the second-round bids is more financing contingencies that we wouldn't probably have experienced in the past. And some people just racing cap rates. And the cap rate differential between the wholesale and the retail segments has always existed. And I'd say those were the biggest manifestations -- people who we thought would make more aggressive second-round bids didn't. And some were with financing contingencies and cap rates were increasing. I think those were the surprises that we experienced in that timeframe. And so, we had someone that we were walking down the path with and we just couldn't reach business terms.

And then on the refranchising, are you seeing financing contingencies and what people are willing to bid for those units as well? Or is that something that's pretty much confined to the sale leaseback?

Well, I will say this about that. How's that? You're getting a wide range on the selling of Company stores. Right? You're getting some lower bids, some higher bids and everything in between. We're really seeing quite a range. But we have, as I said before, there is not a lack of confidence there that we can -- as you might well imagine, we are in negotiations with several people at this call. So, there's lots of work being done.

And again, I don't think Tom or I are putting a doomsday on there. We just thought it was appropriate to give the investment community kind of a heads-up, a disclosure, if you will. It's only April. We have until the end of June. But again, I thought Tom's comment was a good one, which is -- at some point, we're indifferent here. So we've got to do what's right for the business and not just be in such a hurry because we made this end-of-June announcement. We've got to do what's right. And I think that ultimately helps the shareholders, if you will, but this is about making certain that we're adding value to shareholders as well. So that's kind of our thinking, Rachael.

Great, makes sense. Just one last question if I could. For the 150 to 200 basis points of margin expansion at Applebee's, is that the run rate that you hope to get to by the fourth quarter? Or is that the blended uptick in the margin that we should expect for the full year?

It's what we expect, when you look at our P&L, that will be 150 basis points or so better than we were last year.

For the full year?

For the full year. Exclusive of any -- if any of this sale leaseback activity gets classified as rent, which we don't think will be the case, then we would exclude that. But just on food and on labor, we're expecting 150 basis point prudent.

And not to beat a dead horse, but that's why I said, if you look at fourth quarter, admittedly it was a tough quarter. But they have certainly made significant improvements from fourth quarter to first quarter. And we have every expectation they will continue that throughout the year.

Great. Thank you so much.

Bryan Elliott, Raymond James.

A couple of clarifications, actually, on that. The penalty -- or not the penalty, the net present value, the make whole provision -- I hear that, and again, I know I read the 8-K although sometimes I can't understand all the words in there -- but what we're talking about here is if we move into this five-year program, essentially the holders of these notes expecting to have the notes in place for five years, there's a net present value of cash flows over that five years. And you have to make whole if you prepay those notes, essentially. Is that -- am I understanding that right?

That's exactly right, Bryan.

Okay. And so if that happened, we have other debt that we would be able to pay down with our cash flow. And so net-net, nothing would really change if you have to take that option, essentially.

Well, here's what happens. So we had this $350 million piece of debt that was supposed to be paid or we targeted it to be paid in seven months. It had no make whole. So what happens is, if we were -- in a hypothetical case, I don't think this would be the case -- push all $350 million beyond to the five-year timeframe, the first dollar that we get in asset sales when we pay down debt, a certain percentage of that will go to the make whole.

Now, if we paid all $350 million in the seven month period, then the remaining amount of the debt that we'd pay down would be make whole-free. So not only would the $350 million be make whole-free because it was in that seven month period, but the other debt would be make whole-free up to 35% of the total debt. And so all that happens is that the seven month debt, which gets pushed out to five years, gets at the front of the list, and on dollar one, when we start paying down debt after that date, we paid a make whole.

Oh, but they're still first in line; you can't start paying off other debt?

No. I mean, that would be nice day if we negotiated that. No, but that -- it goes to the front of the line, Bryan.

Okay. All right, well, that pre-empts my next question. Just last one -- on the Applebee's margin commentary, the 150 to 200 [pips] of margin goal -- is that essentially a cost reduction or cost control issue? I know you have all mentioned in the past some changes in procedures and other things that -- just doing things smarter and more efficiently, or is there a sales growth sort of contingency on reaching that goal?

I've looked at the plan in more detail than I even want to describe to you. But I would say about two-thirds of it is what I would call cost-containment and one-third of it is doing some things to drive top line sales with it, which then leverages it.

All right. So to sort of get a sense of where that two-thirds piece is, would that be sort of sales consistent with Q1 or even a little worse?

Our guidance for the year is 1% to 2%.

Yes.

And so that 1% to 2% is consistent with the whole 150 to 200?

Correct.

Very good. Thank you.

Steven Rees, JPMorgan.

Just with the largest number of casual dining restaurants now, I think it would be helpful for you, Julia, just to sort of give a state of the union with regards to same store sales. You know, what you're seeing in terms of geographic variability, and I realize that IHOP's out-comping Applebee's, but maybe the brand performed similarly in the same geographies?

Well, there's a couple of things going on. I think the category is experiencing a difficult time. I think Applebee's has a unique opportunity to differentiate itself. So you know me, I will never give into that. Really, in the top 20 markets for Applebee's -- excuse me, for IHOP -- in the top 20 markets, we're not really seeing much negative comps, other than maybe one or two places where there is a specific issue.

On the Applebee's side, you're seeing a little bit more on the coast. Right? The East Coast is doing very well. The West Coast is having a bit of a struggle. So I think it depends on the brand, the timing, the differentiation. But I would say in general, the IHOP differences and Applebee's are pretty large in terms of where you might see a shortness or maybe a struggle. So I wouldn't compare the two at all.

And it is interesting, because in family dining, as you look at the competitors, everyone is having a difficult time, other than maybe IHOP. In casual dining, it's interesting, you see a lot of people having a difficult time. But in the case of Applebee's, we certainly had a better quarter than most. I think our opportunity is to make certain our message is clear, the price/value orientation is there, and see if we can't -- especially on the West Coast with Applebee's -- makes some difference.

Okay. And then I wanted to ask you a little bit about the marketing strategy for Applebee's going forward. I mean, historically, the brand was known for limited time offerings and frequent menu changes and what-not. How are you thinking about the promotional strategy going forward for Applebee's? And what role will value play?

So, it's a great question and the short answer is -- that LTO strategy did not work. So for whatever reason -- I mean, and you and I could sit for a time talking about that -- the idea of forcing people to come in for a limited period of time and order that item and somehow come more frequently, did not work. And I think there's a lot of reasons for that. But at the core, if your base business and your base menu and your base service platform doesn't provide enough for the consumer, then the LTO isn't necessarily going to get you where you want to go, right? As soon as you go off television with that, you're right back where you started from or worse.

So the whole idea on a go-forward basis is think of us as really working on the menu and marketing that menu improvement; marketing that differential to the guests and having them come in, enjoy better service, better food, and want to come back more frequently. So, that's what you're going to see on a go-forward basis -- things on television that really differentiate us from everybody else in the category and really make it unique to us.

And then I think there's a whole cadre of things we can be doing with a neighborhood. So, lots to come, but getting away from that lost leader that wasn't necessarily driving traffic to begin with and getting much more of a holistic view of the brand and the menu.

Okay, thank you. And then finally, just one point of clarification for me. Did you say the Applebee's Company restaurant margins this quarter, excluding all the one-time costs, were down 70 basis points? And if you could just put that into context in terms of how they performed in the fourth quarter?

They were down 70 basis points versus first quarter 2007. We are significantly up versus fourth quarter 2007. It was 10.1% fourth quarter and it's 12 point something percent in first quarter, excluding any transition costs.

Okay. And the new manager bonus program, when does that come into effect?

That started April 1. We ended the quarter with the old bonus program and went into the new bonus program come second quarter.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Michael Gallo, C.L. King.

A couple of questions -- or really, I guess, one main question. I guess if you look at the casual dining industry in general -- and I suppose this applies to both IHOP and Appleby's -- we've begun to see some significant stress of some of the players, obviously recent bankruptcies of FICOR as well as Ryan's and some associated store closures. You've got a lot of people pulling in store openings, breaker closing stores, et cetera. I was wondering if you've started to see any benefit from that kind of activity in some markets, either on the IHOP or Applebee's side? And whether you expect to see the industry start to more significantly rationalize capacity as we go forward? Clearly, the independents in this kind of environment seem to be under significant stress. Thank you.

I think the reality is, it all sort of is one big bucket. I mean, I don't think you differentiate closures from somebody declaring bankruptcy or Chapter 11 or people advertising less.

I always remind people, 75% of the casual dining category and the family dining category is independents. And it's a real mix in independents and chains, who's doing well and who's doing poorly, private versus public. So, I always remind people, there's a real mix in both categories. And we just need to be really sensitive to people doing well clearly can differentiate themselves and stick to their knitting and do well. And I think that's sort of the message I'm giving our folks and certainly the investment community, which is, do what you do well, differentiate yourself, and they will come.

Yes, just coming back to in aggregate, I mean, it seems like in aggregate there's reduced store openings and all of the things that should lead to an environment that's less over-stored, I guess. Particularly on the bar and grill side, certainly you can make the case that the casual dining environment is over-stored. And I was just wondering if you're starting to see some of that in reverse here with some of the recent store closings as well as just guys pulling back on their growth plans?

Yes. With 2,000 restaurants and the largest player in the category, you're not going to see significant impact. You might, in that particular marketplace or in that particular trading area, but when you're as large as we are, I think it would take a substantive change to see marked movement.

Okay, that's very helpful. Thank you.

[Dorraine Minder], Inwood Capital.

Actually, it's Mike Christodolou. Good morning. I wanted to ask about the assumptions behind the $90 million to $100 million of after-tax proceeds from the refranchising. What leverage multiple have you assumed that the franchisees can get financing at?

We haven't gone that far.

Yes, we don't disclose that for the obvious reasons. So we have never disclosed that.

Well, I guess -- so, when the low hanging fruit strategy, though, if it's 150 to 200 basis points off of a 10.5 margin base, that's up, what -- 14% to 18% improvement effectively in the cash flow of the units. But the pulse we're hearing from several sources in the franchisee finance world is that the lending rates have dropped from 4.5 times to three times on cash flow. That's after royalty and rents. So, as we play with the numbers, if the cash flow is boosted, say, 10% to 20%, but the financing multiple goes down 33%, is the cash generation of $90 million to $100 million, is that projection at risk?

As I've said, we have kept our guidance the way it's been all year. We have a very high confidence level. So, no, at this point early in the year, we're not in any way, shape or form, changing our guidance.

I understand. Thank you.

Chris Sippel, Blue Line Capital.

What's the current rate on the seven-month note that could be rolled into this five-year term?

It's 7.2 -- I think it's 7.2% -- 7.2 and change.

Okay. Is that the cash rate or is that loaded with --

No, it's the cash rate. The cash rate.

Thank you very much.

At this time, I would like to turn the call over to Ms. Julia Stewart for closing remarks.

Thanks so much for today. I just want to make sure everybody heard loud and clear -- we're still working to complete a large sale leaseback transaction before the end of June. Remember, we can make up the cost of a make whole through lower cap rates in retail markets with smaller deals. So we want you to hear a voice of confidence, not of concern. And we feel very good about where we're going and how we're going to get there.

So, we thank you for today. Our next quarterly conference call will be scheduled for some time in July. So, thanks again for joining us.

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