Dine Brands Global Inc (DIN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 DineEquity earnings conference call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this 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, Ms. Stacy Roughan. You may proceed, ma'am.

Good morning and thank you for participating on DineEquity's third-quarter 2008 conference call. Today with us from management are Julia Stewart, Chairman and CEO; Gregg Kalvin, Acting CFO and Controller; and Mark Weisberger, General Counsel.

Before I turn the call over to management, let me remind you of our Safe Harbor regarding forward-looking information. Today management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be materially different than those expressed or implied in such statements. We caution you to evaluate such forward-looking information in the context of these factors, which are detailed in today's news release as well as in our most recently filed Form 10-Q with the Securities and Exchange Commission.

In addition, DineEquity disclaims any intent or obligation to update these forward-looking statements.

In conjunction with our prepared remarks today, we have provided an additional information on our IR website at DineEquity.com for your viewing. The document can be found under the Calls and Presentations section of the investor relations website, posted as supporting materials for today's webcast. If you haven't already done so, we encourage you to download the deck.

Additionally, on this call we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news release today and in materials posted on our IR website.

Now, I would like to turn the call over to Julia Stewart.

Thanks, Stacy, and good morning, everyone. Today, we will provide you with an overview of the third-quarter 2008, update you on our same-store sales performance, EBITDA enhancement strategies, and the steps we have taken to maximize our financial flexibility.

But first, let's get started with an update on the solid progress we've made with Applebee's refranchising effort. With a disciplined and focused effort on executing our plan, we have exceeded our 2008 refranchising goal for Company-operated Applebee's restaurants, with more than 100 locations to date that have been sold or are under agreement to be sold before year-end.

Today, we announced the signing of asset purchase agreements, or APAs, for the sale of 66 additional restaurants. This reflects the sale of 22 Company-operated Applebee's in Houston, 37 Company Applebee's in Dallas, and the sale of seven Company Applebee's in Albuquerque. These agreements do not contain any financial contingencies.

The Texas transactions are expected to close sometime in the fourth-quarter 2008, with Albuquerque expected to close early in the first quarter of 2009.

The sale of nearly all of Applebee's lowest profit performing markets will benefit our financial performance with the elimination of the negative impact these restaurants have on our P&L. More importantly, it transferred the stewardship of these Applebee's to the hands of experienced restaurant operators, new to the system, who not only are capable of delivering a higher level of performance in these markets, but who also believe in and are committed to our brand revitalization efforts underway.

Now we are focused on completing the sale of our remaining higher profit performing markets.

We are also pleased that earlier this month we completed the previously announced sale of 15 Company-operated Applebee's in Nevada to Apple American Group. Apple American has now acquired a total of 41 Company-operated Applebee's restaurants in Southern California and Nevada in the last several months and is our single largest Applebee's franchisee, with 189 restaurants in nine states.

We expect to generate approximately $63.5 million in after-tax cash proceeds from the sale of the first 110 Applebee's Company restaurants. Total after tax cash proceeds from transactions completed in 2008 are lower than our previous guidance of $70 million to $80 million for the first 100 restaurants. The lower total proceeds are principally a result of selling virtually all of Applebee's least profitable Company markets, as well as the fact that overall sales performance in Company markets has been below our expectations.

Again, we would caution you not to use 2008 sales prices as a proxy for the average per-store proceeds, as future transactions will include the sale of more profitable markets.

We are actively engaged with several interested buyers for each of Applebee's remaining Company-operated restaurants, except for a number of locations we intend to keep as R&D locations in the Kansas City market.

While the chill in the credit market presents a meaningful challenge to our refranchising efforts, we believe the issues resulting from the credit crisis are not insurmountable. Our current pipeline reflects negotiations with well-qualified buyers who have an appetite and operational ability to acquire multiple markets at a time.

Assuming these negotiations are successfully concluded, we may be able to significantly accelerate our refranchising time frames. We will continue to provide you with updates on our refranchising process as appropriate.

We had hoped to provide you with an updated range of total expected proceeds for the sale of all targeted Company Applebee's restaurants. However, given the environment and the current status of negotiations, market by market, we don't feel comfortable sizing the opportunity at this point in time. Again, we would caution you not to use 2008 sales prices as a proxy for the average per-store proceeds, as future transactions will include the sale of more profitable markets.

We expect to be in a better position to give you our best thinking regarding expected total refranchising proceeds in connection with 2009 performance guidance early next year.

That said, I am very pleased with the progress we've made. Our refranchising team is executing well, given the environment; and the message you should hear clearly and take away from this progress is that we are getting deals done and on terms that make economic sense for us.

I want to thank Phil Crimmins, Applebee's Head of Development, who is leading our refranchising efforts, and his team for their hard work in moving the ball forward throughout the year.

Now, let's turn to same-store sales. Given the increasing turmoil and uncertainties facing the economy and the sharp pullback in consumer spending witnessed in third-quarter 2008, affecting the entire industry, we were pleased with our relative performance compared to others in the space.

IHOP continues to operate from a position of strength due to the comprehensive brand revitalization and operational improvement strategies implemented over the past several years. IHOP's systemwide same-store sales increased 0.2% for the third-quarter 2008, our 23rd consecutive quarter of growth, and increased 2.2% for the first nine months of fiscal 2008.

While IHOP is performing solidly in an exceptionally difficult consumer environment, we remain cautious and are taking additional steps to strengthen our consumer message over and above our core marketing plan for the balance of the year.

One example is Trick-or-Treat All You Can Eat Pancakes, which launched on October 13, supported by national advertising and runs until the end of the month. It's a great sales and profit driving opportunity that was quickly implemented in order to leverage IHOP's strong core equities.

We are also optimistic about the launch of IHOP's new limited time offer, Coffee Cake Pancakes, enhanced dinner programs that are currently being offered in more than 800 restaurants, and the holiday gift card season, as we look to continue positive system momentum for the balance of the year.

As previously announced, we expect IHOP's same-store sales growth to come in at the lower end of our original 2% to 4% guidance range, which is at a meaningfully better level than IHOP's closest competition.

With the Applebee's brand, we are only at the beginning of our planned multiyear revitalization process. Throughout 2008, we have been focused on both stabilizing the business and building the foundation for growth in 2009 and beyond. Applebee's systemwide domestic same-store sales decreased 3.1% for the third-quarter 2008, and 1.4% for the first nine months of fiscal 2008. Unfortunately, the strong headwinds in consumer spending we witnessed in third-quarter 2008 were not offset by the new value promotion we introduced.

Now, looking at the balance of the year, Applebee's launched a new value promotion last week, Two for $20, which offers guests what we believe is a compelling value message -- a shareable appetizer and two entrees for only $20. Two for 20 will have the benefit of heavy TV weights overall, particularly in comparison to a lower level of advertising spending expected from most of the competition.

We see this promotion as a bridge to the introduction of several new menu items, which we will begin promoting early next year. Along with menu innovation will come enhanced advertising and marketing strategies that further leverage Applebee's It's a Whole New Neighborhood message.

Because we are in the early stages of our brand revitalization effort, and in recognition of the difficult consumer environment we are facing, as previously announced we expect Applebee's systemwide domestic same-store sales growth to range between negative 1% and negative 2% for the full-year 2008.

Turning now to Applebee's Company operations, operating margin improved 220 basis points to 11.4% compared to a 9.2% operating margin in the third quarter last year, excluding 10 basis points of pre-opening expense. As a percentage of sales, food and beverage costs increased by 30 basis points on a consolidated basis due to a higher commodity cost and value campaign and price mix, offset by menu price increases and better menu optimization.

Additionally, total labor as a percentage of sales decreased by 80 basis points, primarily due to a reduction in hourly wage rates and lower management bonus payouts. Applebee's also experienced an approximate 170 basis point improvement in direct and occupancy costs, primarily related to purchase price allocation adjustments highlighted last quarter.

Together, these operating margin performance factors resulted in a 13.8% increase in segment profitability to $30 million in the third-quarter 2008 versus the same quarter last year.

Year-to-date, operating margin is up 70 basis points, excluding 20 basis points of pre-opening expenses, at 12% versus the same period last year, as we remain on track to deliver our expected 150 to 200 basis point margin improvement for the full year 2008.

From an operations perspective, we are making progress with operational improvement initiatives at the Company's store level. Over the last three months, we have seen a significant improvement across all key consumer measurements including the guest's likelihood to return; increase in overall guest satisfaction; faster meal delivery times; food quality scores; and server attentiveness. We still have considerable work to do in these areas, and we will continue to drive improved results and strive to ensure every guest leaves happy.

Turning to purchasing, as you may be aware, we are working on the formation of a procurement co-op between the Applebee's and IHOP franchisees, and we've made good progress to date. Franchisees from both brands are supportive of the co-op effort, and we are currently in the negotiation phase, finalizing the operating relationship details. We continue to work toward our goal of having the co-op formed by January 1 of next year.

Finally, I want to make you aware that beginning in 2009, we have decided to discontinue our practice of previewing quarterly same-store sales results in advance of our earnings release. We believe that same-store sales are best explained in the context of full financial results, in recognition, in part, of the impact of same-store sales have on our Company restaurant operating performance.

Now with that, I would like to turn the call over to our Controller and Acting CFO, Gregg Kalvin.

Thank you, Julie, and good morning, everyone. Let me first quickly walk through our financial performance for the third-quarter 2008, focusing our discussion around the key performance measures of the business; cover the impact of refranchising; and then touched on our debt ratios.

Our third-quarter results reflected the continued positive performance of our core IHOP franchising business and the addition of Applebee's franchising business. This produced a $36.9 million increase in franchise operations' profitability, primarily due to a full quarter's recognition of Applebee's franchise operations' profit, and a 6.7% increase in IHOP franchise operations' profit.

EPS for the quarter was impacted by a non-cash impairment charge of $28.3 million, primarily associated with the sale of some of Applebee's Company-owned restaurants in Texas, Nevada, and New Mexico. All of the restaurants involved in the transaction were assigned an estimated fair value as part of the purchase price allocation at the time of our acquisition of Applebee's. Subsequently, we noted deterioration in the real estate values, sales and operating profit at Company-operated Applebee's restaurants since the acquisition in November of last year.

We ultimately concluded that the estimated fair value of the restaurants determined in the purchase price allocation was reasonable and appropriate as of the time of the acquisition; and that the decline in value related to market events that were subsequent to the acquisition date. This decision resulted in an impairment charge, as opposed to an adjustment to the allocated purchase price. Again, this was a non-cash charge.

Our earnings per share loss of $0.98 for the third-quarter 2008 was impacted by an increase in interest expense of $50.5 million, primarily due to Applebee's acquisition-related debt versus prior year. Approximately $10 million of this interest expense related to non-cash items, primarily associated with financing-related costs.

Turning to an important lever in our business, G&A. Consolidated G&A increased to $41.8 million year-over-year, reflecting a full quarter of overhead expense at Applebee's. G&A was $20.2 million at Applebee's; $11.3 million at IHOP; and $10.3 million at the corporate level during the quarter.

Consolidated G&A included $3.2 million in non-cash stock compensation expense and $3 million worth of retention and severance related expenses for the quarter. We are pleased with our G&A management year-to-date and are on track to meet our full-year consolidated spending expectation of between $186 million and $199 million.

We are well on our way to achieving savings additionally at least $50 million, in 2007 dollars, from changes in our operating structure as we refranchise Applebee's Company restaurants and optimize synergies between Applebee's, IHOP, and DineEquity. We realized approximately $12.9 million in annualized synergistic savings in 2007 and expect annualized G&A reductions to approximate $15.8 million in 2008.

For 2008, the sale of Company-operated Applebee's restaurants is expected to result in annualized savings of approximately $6.2 million.

Looking at income taxes, our effective income tax rate for the third-quarter 2008 was 20.9%. This is better than the second-quarter level of 35.8%, reflecting the benefit of compensation-related tax credits associated with Applebee's Company-owned restaurant operations on a lower net income basis.

I would like to caution you that our tax rate will be highly variable as long as we are selling Company-operated Applebee's restaurants.

Moving to our cash performance, consolidated cash from operating activities was $61.3 million for the first nine months of the year, a 32.3% increase versus the same period last year. The growth in cash from operations was driven by higher cash earnings as a result of the acquisition of Applebee's.

We revised our consolidated cash from operations guidance to range between $85 million and $95 million for fiscal 2008, which primarily reflects lower than expected operating results from Applebee's Company-operated restaurants, offset by the expected receipt of certain federal and state income tax refunds before year end.

Last quarter, we gave specific components of cash flows from operating activities which, while directionally still accurate, will be subject to variability based on our franchising activity. As such, we are not prepared to provide additional detail at this point in time.

The IHOP business generated $12.4 million of cash (technical difficulty) structural runoff of principal payments related to its long-term notes receivable for the first nine months of 2008. During the same period, consolidated capital expenditures increased to $27 million as compared to the same period last year, primarily due to the capital needs of Applebee's Company-operated restaurants and final construction expenditures on Applebee's Restaurant Support Center in Lenexa, Kansas, recognized earlier in the year.

This resulted in consolidated free cash flow -- which we define as cash from operations plus the receivables runoff less CapEx -- of $46.7 million for the first nine months of 2008.

During the third-quarter 2008, we utilized available free cash flow to retire approximately $23.5 million in consolidated funded debt purchased at a discount to face value. Last week, we additionally were able to purchase $35.2 million of consolidated funded debt at a discount to face value. We expect to retire these bonds over the next several days.

Additional uses of free cash flow during the third quarter included the payment of our common and preferred dividends, as well as $24.3 million in unpaid transaction-related expenses associated with the acquisition of Applebee's.

Now, I will take time to cover a few topics related to our debt. First, I wanted to clarify our relationship with Lehman Brothers, given their recent bankruptcy filing.

As you may know, Lehman held all the securitized notes related to the financing of our acquisition of Applebee's at the time the transaction closed. Since then Lehman, to the best of our knowledge, has placed a substantial majority of the notes with third-party investors. I want to emphasize that our cost of capital was fixed at the time the notes were originally issued and is not variable.

A Lehman Brothers subsidiary is the counterparty on the Applebee's Variable Funding Note, or VFN, commonly known as a revolver. Under this facility, Applebee's has a credit line of up to $100 million. We proactively drew down the remaining $35 million available on Applebee's VFN as a precautionary step, due to uncertainty as to whether the funds would be accessible to the Company in the future. It is important to understand that the drawdown was not the result of any liquidity issues of the business and should not be construed as such. Frankly, we would not be paying down debt if that was the case.

Rather, it was a proactive, prudent move made in response to Lehman's bankruptcy. Looking ahead, given the credit environment and Lehman's status, we expect to hold on to the full amount of the VFN funds indefinitely, which is reflected in our increased cash and cash equivalents line, to ensure maximum flexibility.

With regard to our consolidated leverage ratio covenant, the calculation assumes both the Applebee's and IHOP VFNs are fully drawn down, regardless of the actual amount drawn down. Therefore, this $35 million draw on the Applebee's VFN does not affect our consolidated leverage ratio. However, it does negatively impact the debt service coverage ratio by approximately 4 basis points.

Turning to our debt ratios, our consolidated leverage ratio at the end of the third-quarter 2008 was 7.17 times. That is below the current debt covenant threshold of 7.75 times for the IHOP securitization. The IHOP securitization contains a lower consolidated leverage covenant then the Applebee's securitization.

As of the end of the third-quarter 2008, our debt service coverage ratios or DSCRs were 3.28 times for IHOP securitization on a three-month unadjusted basis, and 2.56 times for the Applebee's securitization on a three-month adjusted basis. Both DSCRs remain well above a minimum required debt covenant ratio of 1.85 times.

Now I will turn the call back to Julia to detail more of the proactive steps we are taking to ensure our continued financial flexibility.

Thanks, Gregg. First, I want to take this opportunity to thank Gregg as the Acting CFO, and his entire staff, for seamlessly continuing to support our finance and accounting activities throughout our quarter close process. We haven't missed a beat.

We're moving ahead with our CFO search and have completed first-round interviews. I've been impressed with the quality of the candidates and the breadth of experience they bring to the table. I'm optimistic about having a new CFO in place before year end.

Now as we mentioned on the last call, we expect to remain in compliance with our debt covenants based on current plans. However, our margin of error is expected to be tighter than we would like next year. As a result, we have identified three key areas of opportunity to pursue, to ensure maximum financial flexibility to meet our debt obligations.

First, we have identified and are executing approximately $20 million of profit optimization opportunities to drive EBITDA performance improvement, beginning in the fourth-quarter 2008 and continuing through the end of next year. This includes such areas as modifications to our hourly benefits program, leveraging the scale of our combined organizations with the adoption of a single 401(k) program for all employees, travel expense reductions, changes in vacation policies, and reductions in the accrual for incentive-based compensation in 2008.

We also have renewed our focus on optimizing G&A spend, in line with the evolving needs of each business unit and the parent Company.

To size it for you, each $7 million of increased EBITDA represents an approximate 10 basis points of improvement in our leverage test. So approximately $20 million of EBITDA enhancements would translate into nearly 30 basis points of improvement to our consolidated leverage ratio over the next year.

We also have the discretion to use free cash flow for the retirement of consolidated funded debt. As Gregg mentioned, over the past few months we have retired a total of $58.7 million of funded debt at a discount to face value. Buying our debt at a discount is another way for us to opportunistically accelerate our deleveraging; and we will continue to do so whenever possible.

So, with these added steps over and above executing our core plan, we are confident that we have created the appropriate amount of financial flexibility required to meet our debt obligations.

It's important not to lose sight of the fact that through a combination of refranchising proceeds, sale-leaseback related rental assignments, the use of free cash flow to retire debt, along with the retirement of our short-term debt and sale-leaseback activities earlier this year, we expect to have reduced our consolidated funded debt financing obligations by approximately $500 million in 2008.

In closing, I want to emphasize that our strategies for Applebee's and IHOP remain fundamentally unchanged and the core of who and what DineEquity is remains intact.

We are an experienced franchisor of restaurants with a proven expertise in revitalizing and optimizing brands. We've developed a competency for tight G&A management and have demonstrated that we know what it takes from an expense perspective to get through challenging times.

We are now taking this skill set and applying it to how we manage our debt position. We are disciplined in our approach and have our arms around the variables that could impact our ability to meet our obligations.

Throughout 2008, despite the increasing turmoil in the economy, we have remained dedicated to the strategic path we laid out for Applebee's at the time of the acquisition. We've completed the sale-leaseback of restaurant real estate and the Applebee's headquarters building. We are delivering on refranchising expectations for the year, and then some.

We are beginning to see operational improvements in Applebee's Company restaurants. We have developed and are ready to launch a robust pipeline of new menu items and improvements throughout 2009. We have a strong brand campaign from which to grow and enhance Applebee's marketing efforts. With Mike Archer and the team in place, we have excellent leadership moving the business forward.

We have begun to realize synergies between the Applebee's and IHOP organizations. And throughout it all, the IHOP system continues its strong and sustainable momentum, showing us what is possible as we implement similar revitalizing and restructuring strategies at Applebee's.

In these ways, I remain confident that together the Applebee's and IHOP brands will be more powerful and more successful than they ever could have been apart. With that, we would be pleased to answer any questions you might have. Operator?

(Operator Instructions) Chris O'Cull, SunTrust Robinson Humphrey.

Good morning, guys. Let me start off with a question regarding the debt. How does being able to repurchase the debt at a discount influence your decision on the selling price of the Applebee's units?

I'm not sure I understand the question.

Well, if you're able to retire debt at below par value, does that allow you to sell the units at a lower price in order to repay the debt?

Yes, one doesn't have anything to do with the other. I think -- if that is where you are going. Retiring the debt at a discount is something we found opportunistically to do. And selling the restaurants is something else that we are doing.

Okay, so that does not factor into your decision making for the selling value of the units?

No.

Okay, great. Then switching to promotions, Julia, the last two promotions, I think they probably fell short of your-all's expectations.

Why wouldn't you maybe take a more market-based approach to some of these value promotions? Especially in light of the -- in terms of just the different performance we are seeing in markets across the country.

Are you talking about Applebee's?

Yes.

Well, you've got two issues going on here. You have a tremendous opportunity with so much marketing power. If you think about it, we shout louder than anyone else in the category. So we know for a fact that in terms of unaided awareness, we have a real opportunity to be out there in the public's eye shouting loudly. So an aggressive campaign like this Two for 20 we believe will do just that.

That isn't to take away from the fact that locally franchisees across the country at Applebee's do do additional local marketing efforts, especially with late-night promotions and the like. They are doing different things locally.

But on a national level, we have an opportunity to shout louder and harder and I think better than anybody else.

The Two for 20 promotion, it is my understanding that is everyday.

Yes, and that is a shareable appetizer -- so basically it's an appetizer for free, if you will; and then two entrees for $20. That aired starting last week.

Okay, I mean, one of the questions I guess would be -- I know some of your competition is doing a similar kind of promotion, but it's for early week rather than for the full week.

Do you expect this to affect weekend sales in terms that could be less profitable to franchisees and to the Company stores?

Quite the contrary. I am thrilled that we are doing this all week, which makes our offer far better than the competition and I think drives traffic, which obviously creates profitability.

So the franchisees are supportive of this promotion; and all in all, I think it provides us, frankly, a position of strength as opposed to confusing consumers with it's only available at a certain time.

Okay. So you feel like you are driving enough traffic, sufficient traffic, to make up for maybe the discounted price on the weekends?

That is absolutely the objective.

Okay, okay. Then, lastly regarding some of the changes you made at the restaurant labor line, would you explain the rationale for altering the hourly wage rates and maybe the bonus payouts? Is there any risk that this could affect service levels? Or was this just you guys trying to get more in line with the market?

No, so let's talk about your second point first. The bonus was something we changed at the end of first-quarter 2008. That was because we determined, after we made the acquisition, that the bonus really didn't meet our objective. So we put a different bonus plan in play that is far more inducive to sales and profits. I think we mentioned at the end of first quarter that it might take a while for that to have an impact; so you didn't see much in second quarter.

You truly saw that impact third quarter. It is just a bonus program that is designed to give people a bonus incentive based on the things that really are important to us, driving top line and bottom line.

So that hasn't had an impact at all on turnover. So that was number two.

Number one, the hourly wage rate. That has everything to do with consolidation. You have a lot less turnover. You don't have to pay people necessarily more money to get them in. Cross-training. It's a combination factor; it is not any one thing.

But neither of those things -- none of it, in fact, is having an impact on our turnover rate. We've always -- and Applebee's gets all the credit in the world for this -- has always done a great job on retention. So these items in conjunction with how hard we are making an effort to keep people in play is working.

Okay, great. Thanks, guys.

Rachael Rothman, Merrill Lynch.

Can you guys talk about -- I know you mentioned that the stores that you sold or are in the process of selling are the lower margin stores. Can you help us frame how we should think about 2009 from a Company-operated margin perspective, given the elimination of the lower margin stores?

You know, Rachael, like we said, because we are smack-dab in the middle of negotiations, it is really difficult for us to say. If we've got a material change, we will do that before the end of the year.

But you should think of those restaurants that we sold -- I think I said on the last call, I used the technical term -- they were the dogs. So you should think of those on the low end of where we've been.

Definitely not think of those as average. It is our intention right now when we come out with 2009 guidance to provide a substantial update and quantify it and give you where we are with margins, what we're able to quantify. But it's really difficult today.

Okay. Then in terms of the reduction in your free cash flow guidance, was there any commensurate change in the working capital? Or can you help us parse where the reduction came from, given that EBITDA seemed much stronger than expected and CapEx was in line.

So maybe can you just help us break down where the $10 million reduction came from?

Hi, Rachael. This is Gregg. Primarily on the slowdown of the Applebee's business on the same-store sale line, that is primarily driving the number downward as we get into the end of the year. So that reduction is the primary factor right now.

Now, there are a lot of variables, obviously, that go into that. But that is the way you should think of it.

Okay. In terms of the $20 million in incremental G&A savings that you guys are going to start in the fourth quarter, how long should we think about it taking before you hit that run rate?

Well, some of it we will get in 2008, and the rest of it we'll get in 2009. So the way you should think about that is an annualized number.

But none of it was in the third quarter; is that correct? Because you reiterated your '08 (multiple speakers).

Right, none of it was in third quarter. All of it we just implemented in 2008, going into fourth quarter. So you will see -- like I said, you will see some of it in fourth quarter.

Like the bonus is a good example. Right? That is a 2008 accrual. That happened -- the bonus change happened and -- actually, that was third quarter.

There is a little bit in the third quarter, Rachael, that is going to trickle into the third quarter. Then from, let's say the beginning of the third quarter, mid third quarter on, it will be over the next 12 months, essentially.

That's a good point. We took that accrual reduction in third quarter, so you'll see that. The large majority of what I spoke to happened in fourth quarter, but some of it was third quarter.

But the way to think about it is the numbers we gave you for G&A, that is a 2008 total; and then obviously we have got lots of things we can do for 2009.

So for 2008, should we expect it now to come in at the lower end of the guidance range, since there was no change in the guidance?

The lower end? I'm sorry, the lower end of the guidance for which piece?

Of the G&A guidance? Sorry, I think it was -- let me just pull it up. Maybe 188 to 199 had been your guidance?

Yes, I think you should think in terms of the lower end.

Okay. Then can you talk a little bit about what the cash outlay to retire the $58 million or $59 million worth of debt was?

You know what, we're not going to do that. We have chosen not to communicate our discount rate on those bonds.

Okay. May I ask -- go ahead, Gregg. Sorry.

Your question -- just on the discount rate? Or is it also on the -- where -- the source of the funds?

Well, the source of the funds, I'm guessing you used from free cash flow and from the (multiple speakers).

Right, okay. I'm sorry, right.

Yes. From an accounting perspective, if you buy in a liability at below book value, let's say, is there a gain associated with that?

Yes, there is a gain on the sale of the bonds; and there is a related tax impact also that we will be paying out. So when we reflect that transaction in the fourth quarter, those numbers will come out in the financial statement.

Because essentially if you are buying at a discount, there is a -- your basis in the bond is par; and then if you buy a discount you have a gain.

Okay, but the gain was not recognized in the third quarter for the $59 million that would be booked in the fourth quarter?

Part of it was. There were two pieces to the $59 million. There was a $23.5 million piece in Q3, and there was a $35.5 million piece in Q4. So part of it is in the Q3 numbers.

Okay. Can you tell us what the Q3 gain was?

The Q3 gain was net of the writeoff. We have to write off certain deferred financing costs with it. The net gain was $2.5 million and it's reflected in the P&L.

Is it above the line or below the line?

Hang on a second. It's in the cost number.

Is it lumped in with the impairment charge for (multiple speakers)?

No, it wouldn't be in the impairment charge. I think it is in other. I'm checking for you here.

It is in the gain. It is a single line item on the P&L. I am looking at. It is a gain/loss on extinguishment of debt. It is called out separately. It's $2.4 million is what is in the Q3 numbers.

(inaudible) million gain. Okay. Then it looks like all of the units that were sold are in contract for sale, the new 66, are to operators that are outside of the (technical difficulty) system?

That is correct.

Can you tell us maybe what that signals or how we should go about thinking about that? Because I know initially there had been some pretty strong demand from the existing franchisees. Are they just interested in a different market? Or what should we read into the fact that these are all new franchisees?

I don't think you should read anything into it. We've said from the very beginning that we were going to build a pipeline of new franchisees as well as existing franchisees.

If anything I think you should think of it as a positive sign that people believe in the future of Applebee's and therefore want to get into it. I wouldn't read anything into it other than you've got new and existing franchisees interested in the marketplaces.

Did you guys have bids earlier in the process that may have seemed low in the context at the time but, given what has happened in the credit markets, maybe seem interesting at this point, that you may want to revisit?

No. I think the bigger issue here, Rachael, is -- and this is why I have been very hesitant to communicate in a lot of detail. We are as I said in the midst of negotiations for all of the remaining markets, some form of negotiations, and have backup buyers.

So it's really a complicated process that we are going through, and I have tried to be respectful to Phil and his team about letting that process take hold.

Okay, great. Thank you very much.

Michael Gallo from CL King.

A couple questions I had. First, the G&A in the third quarter, it was lower trend-line-wise than it had been for the prior couple quarters. Yet the guidance was reiterated to be the same.

What drove that? Were there just timing differences or anything unusual?

I know you alluded to some of the accrual changes. But was there anything else unusual in the G&A item in the quarter?

Yes, well, third quarter is the quarter in which we took a bonus accrual reduction. So that was the big change in third quarter.

Also, we adjusted -- we had a vacation policy adjustment also.

Yes, both those things happened in third quarter. And like we said, we are guiding on the low end of the G&A number for the full year.

Right, okay. Second question I have is just on the franchisee financing environment overall. Obviously, there has been a lot of talk about certain lenders either reducing their involvement in the market or exiting it altogether.

I was wondering if you could give us some commentary on franchisee financing sources, what you're seeing there. Particularly, I guess, in terms of your franchisees continuing to have access to capital to either build new units, which certainly is more relevant on the IHOP side, or to continue to purchase refranchised Applebee's. Thank you.

So, it is absolutely correct that this is a difficult credit environment. I think when we've talked about we are and working with franchisees who are well qualified, that is a real range of creative financing, including private equity players who have got the wherewithal to finance all-cash deals. Or franchisees who have sufficient equity to put in a deal with a regional or a national bank to fund the balance. Essentially, we are just dealing with all kinds of different folks out there who can do a range of financing.

If you think about the deals we announced today, those are all-cash deals, but we are absolutely working with people who have access to capital. We know it's tougher, and that is absolutely correct, but we are working with folks to come up with different ways that they can get funded.

But it's mainly what I said. Private equity, people who have got access to funds, or all-cash deals.

Okay, that's helpful. Then just final question, somewhat of a follow-up. Did you disclose how many real estate parcels or land, etc., were sold with, I guess, one, the Southern California stores, now that those are closed? And two, with the recently announced sales?

I'm sorry?

He's asking how many of the 110 restaurants were in those parcels.

Of the sale-leaseback restaurants? 27.

Okay, and the 27, was that just by coincidence -- was that, the 27, for the Southern Cal?

No.

In the aggregate, over the 110.

Yes. No, the 110 restaurants in total, 27 of them were in the sale-leaseback transaction; and they are sprinkled throughout the 100.

Okay, so it was pretty much dispersed throughout. There wasn't, it sounds like, a big allocation to one of the transactions.

That is correct.

That is fair to say.

And that is going to probably be ongoing. I think people have asked us repeatedly about if those 180-some restaurants are anywhere; and I have always said they have sort of sprinkled across the US.

Right, okay. That's helpful. Thanks a lot.

Steven Rees, JPMorgan.

Just on the refranchising, perhaps you can provide some color around what appear to be underperformers that are getting sold first. You spent some time negotiating those deals.

What were the issues? Was it sales? Was it margins? Operations?

What do you think, or what have you gleaned from that experience that you think you can implement across the system from selling these dogs first?

Nothing. I think every deal is uniquely different. If Phil has taught me one thing, he has taught me that every single one of these deals just have different issues, the franchisees have different concerns.

I think if anything what we've learned is to sort of handle each deal separately, working with that particular buyer and what their needs are, what their orientation is, what they may know about the marketplace, and what they uniquely are looking for in that transaction.

I think as we said in our prepared remarks, that the negotiations that we are doing right now, a lot of these folks have interest in more than one marketplace. So that makes for different negotiations. But I truly believe each of the deals is sort of uniquely different.

Okay, but just from a unit perspective, were these underperforming in terms of their overall sales volumes, or do they have margin issues, or both?

Both.

Okay.

Yes, both. So you really do have to look at every single deal differently. Those buyers have access to the data room. They look at the information. You are looking at 12-month trailing average; you're looking at the future; what you think the brand can do.

I think a lot of what people have expressed an interest to Phil and the team is that they believe in the future of the brand. They believe in the revitalization. They believe in what we did for IHOP. And they believe we will be involved with that again (technical difficulty).

So they are in the money and they want to get involved in the business.

Okay. Then when you talk about significantly, or potentially significantly, reaccelerating the program, is that just from the 110 units you did this year? Or are you talking about potentially moving up the finish line from, I guess, what would have been year-end 2010?

No; as I said in our remarks, we are under negotiation, some form of negotiation, for all of the remaining restaurants. It may or may not come to fruition. That is why we are absolutely today at (technical difficulty) the sense that because Phil and his team is in some form of negotiations with the remaining restaurants, we could accelerate.

And it also could not happen. This is an interesting environment right now, so I at least wanted to signal that. But anything is possible.

Okay. Then just, you made some pretty good progress on the margins, on the holding food costs relatively flat in a tough commodity environment; and then actually getting some good labor savings.

As you think about the next two to four quarters, what additional labor savings, if any, do you see? And how are you thinking about food costs with what looks to be a pretty big new lineup of products coming in '09?

Well, I think labor, we've made some real progress and I think we will continue that progress, with the comments I made about what kind of things we took into play and really trying to leverage. So I think we may see some continued improvement although we put a lot of those actions into play. So I'm optimistic.

On the food costs line, I think the real big issue is the co-op. Right? I said that it looks as if at this point we will be able to have a procurement co-op by January 1, 2009, so the real value is for those folks to get underway, combine the effort either with SKUs or with distribution, to make some real heavy lifting results in 2009.

We started some of that already with the existing procurement team trying to put those systems together. But it's a lot easier when you have commitments from all of the franchisees (technical difficulty) yes, I am willing to buy from the co-op, in terms of giving you full value for the different vendor partners and the different distributions.

So we will see. I think some of the benefit in '09 gets I think more fully vetted into 2010. But I think everyone is hoping that we can move quickly so that we can see the real benefit in 2009.

Okay. Then just finally, unfortunate we don't talk a lot about the IHOP side, but can you just talk about how the franchisees are managing their profitability now that they are seeing a comp slowdown that they haven't seen in a couple of years? And whether or not you think the credit situation impacts them and their ability to grow units in 2009?

No -- well, first of all, we have not issued guidance for 2009. But I think it says a lot that in 2008 IHOP has not missed a beat in terms of its development and its progress. It's certainly out-developing everyone else in the category.

So I would say at least for the foreseeable future, they are doing extremely well. Think about the revitalization efforts that they've had in play now for a couple years. They are looking at their development plans; on the foreseeable future, I don't see any slowdown.

Although we have not issued '09 guidance, I think you should ask us that question again in February, but you know, the economy is uncertain. So anything is possible. But I think because of our focus on the things we can control, whether it's our core plan, the EBITDA enhancement, free cash flow to buy debt down, and the sort of effort on all that we are doing, I don't see anything in the short term. Certainly not on the IHOP side.

Okay, great. Thank you very much.

(Operator Instructions) Tom Forte from Telsey Advisory Group.

Great. The first question I had was on refranchising. I wanted to know to the extent that as the quarter progressed and the credit market tightened, got more difficult, I know you talked about how these transactions were cash deals. But how should we think about -- based on other comments from Domino's Pizza and other operators in the restaurant space -- that have suggested that the ability for companies to get financing for refranchising transactions has been severely limited in today's operating environment?

I don't know. I mean the truth of the matter is, like we said, each of these deals is in some form of negotiation. We are looking at every single financing alternative and will continue to give you an update. If there is a material change in the fourth quarter, we will bring that forward. If there isn't, then we will communicate that on our next investor call.

But I think -- I know that people are looking for hard answers, but in this environment, I think the fact that we are in some form of negotiations with everyone in the markets is probably the most positive news we can share.

Then from a competitive standpoint or from a market standpoint, when you think about potential things that may stimulate sales for casual dining restaurants, I wanted to know what your thoughts were on perhaps lower gas prices; and then to the extent that you may be seeing an decrease in supply in the bar and grill space, either through slower unit growth by the competition, or perhaps an increase in store closures.

You know, I think those things help. At our scale we are so large at almost 2,000 restaurants in the US, I think it may help in pockets of the country if there is a slowdown in development, or there is an unfortunate closure.

But I think realistically, what we have really focused our efforts on, which is hopefully what came out today, is all of the efforts we are making in our operational improvements, our marketing enhancements, really focusing on the pipeline. That is what we can really control and are very focused on.

Our franchisees have been incredibly supportive of that, and I think that is what you will see for 2009. That has got to be our real focus.

Okay, great. Thank you very much.

Howard Penney, Research Edge.

My question has been asked. Thank you.

Nice to talk to you, Howard. That was short.

(Operator Instructions) This concludes our question-and-answer portion of the call. I would now like to turn it over to Ms. Julia Stewart for closing remarks.

Okay. Well, I appreciate everybody being on the call. Our next call is scheduled for late February. If there is something material we need to disclose in fourth quarter, we will certainly do that. Otherwise, Happy Halloween and happy holidays. Thank you.

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