Dine Brands Global Inc (DIN) 2008 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the fourth quarter 2008 DineEquity conference call. My name is Tanya and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Stacy Roughan. Ms. Roughan, please proceed.

Good morning and thank you for participating on DineEquity's fourth-quarter 2008 and 2009 performance guidance conference call. Today with us from management are Julia Stewart, Chairman and CEO; Jack Tierney, CFO; and Gregg Kalvin, Corporate Controller.

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 releases, as well as in our most recent 10-Q and 10 K filings 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 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 IR site posted as supporting material for today's webcast. If you haven't already done so, we encourage you to download the presentation.

Additionally on this call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news releases today, which are also available on our IR site.

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

Thanks, Stacy, and good morning, everyone. Today we will provide you with a quick overview of our fourth quarter and fiscal 2008 results, update you on where we stand with regard to selling Applebee's company-operated restaurants, and then finish up with a discussion of the steps we have taken to ensure our financial flexibility.

But first, I would like to welcome Jack Tierney to DineEquity. For the past three decades, Jack has served in a variety of senior finance roles, including Chief Financial Officer, Controller and Chief Accounting Officer for both domestic and international companies, most recently serving as the CFO of the Dial Corporation. We are pleased that we have been able to attract a CFO with Jack's qualifications and believe his extensive experience across several industries will benefit the Company and our shareholders in the years ahead.

Thank you, Julia. I am glad to be here and I look forward to getting to know our investors and working with the teams at DineEquity, Applebee's and IHOP as we achieve our goals in 2009.

Now since Jack just joined DineEquity three days ago, we figured we would give him a break and we would ask Gregg to lead our financial discussion today. Gregg and I want to take this opportunity, and I want to say thank you personally for a great job you've done acting as the CFO over the past months. We didn't miss a beat, and that is thanks to you and your entire staff dedication in seamlessly continuing to support our finance and accounting activities. Thank you.

Now let's start by covering some of our key performance factors for the fourth quarter and full-year 2008. Now, starting with same-store sales, the fourth quarter was a challenging time for IHOP and Applebee's. The sharp pullback in consumer spending, which began in the third quarter, continued to be a dominant factor for both brands in the fourth quarter 2008. IHOP's system-wide same-store sales performance turned negative, decreasing 1% for the fourth quarter 2008 compared to the same quarter last year. We were very pleased to continue our track record of positive annual same-store sales with our sixth consecutive year of growth, with a 1.5% increase for the full year 2008. Our performance for the quarter was particularly challenged by a difficult comparison to the prior year's strong quarterly growth of 3.7% in 2007.

National media rates were also lower in the fourth quarter, primarily due to the prioritized advertising around IHOP's 50th celebration, Discover American Pancakes, during summer months. However, IHOP entered 2009 with an exceptional value message, all-you-can-eat pancakes, and we are encouraged with the results to date.

Also, some of you may be familiar with the lengths to which IHOP's closest competitor has gone to focus America on serious breakfast. And if you will indulge me for a moment, we want to thank them. The day this competitor gave away breakfast, IHOP's sales were significantly up that day and continued strong for the remainder of that week. I think this is a terrific example of the fact that no matter who talks about breakfast, whether it's a direct competitor, whether it's the quick service players, it nearly always is a great thing for IHOP.

Yesterday, we celebrated our fourth annual National Pancake Day with our charitable partner, Children's Miracle Network. I am so proud of the National Pancake Day because it is more than just a day of giving away our terrific signature pancakes. It's about supporting a great charitable cause and giving back to the community. Our franchisees rally around it, and we deliver value to our guests and make them feel good about being a part of it. That's how IHOP makes a difference and it's how we will continue to lead the category. I can't wait to share the results with you. We got preliminary results maybe an hour ago that said were substantially up in traffic versus a year ago, but we'll know more here, and I promise to get something out to you shortly.

Turning now to Applebee's, Applebee's system-wide domestic same-store sales decreased 4.6% for the quarter, fourth quarter 2008, compared to the same quarter last year. Applebee's marketing efforts during the quarter included an enhanced value offering, two for $20, supported by national advertising; a holiday gift card promotion program; and the continuation of Applebee's it's a whole new neighborhood campaign. Applebee's ended 2008 with same-store sales that decreased 2.2% for the full year, relatively in line with our expectations.

Turning now to Applebee's Company operations performance, by focusing on our restaurant-level profit performance initiatives, we significantly increased our profitability during the quarter by delivering a 280 basis point improvement in operating margin. Applebee's operating margin of 10.7% for the quarter was primarily driven by improvement in the management of labor expense and food and beverage costs, which more than offset higher commodity and utility costs.

We also met our full-year expectations for improving margin performance, ending 2008 with a 120 basis point increase to 11.7% operating margin, excluding pre-opening expense. Approximately 110 basis points of this gain resulted from purchase price allocation adjustments, primarily favorable depreciation expense.

Earlier this month, we were pleased to meet a significant milestone with the successful formation of a purchasing cooperative for the Applebee's and IHOP system. It's the first of its kind in both casual and family dining and was made possible as a direct result of the Applebee's acquisition. It was also a true collaborative effort and I want to acknowledge our franchisees and the team responsible for making it happen. The co-op will now manage the procurement of goods for 3400 franchised and company operated restaurants for both brands and is currently projected to deliver 3% to 5% in cost savings to our franchisees over the next several years. Including the favorable impact of the co-op, we expect commodity cost increases for both Applebee's and IHOP to be under 3% for 2009.

Turning now to re-franchising, I am pleased to report that we successfully closed transactions for the sale of 103 restaurants over the past year, with the Texas market that closed in the fourth quarter 2008. In addition, this week we close five of the seven restaurants in Albuquerque slated for sale for a total of 108 restaurants sold. We are pleased to see these restaurants in the hands of experienced restaurant operators. They bring a true owner/operator mentality to the table and are committed to our brand revitalization efforts underway in ways that we believe will lead to a higher level of performance in these markets. We generated approximately $61 million in after-tax cash proceeds from the sale of 108 Applebee's company restaurants in Texas, New Mexico, Nevada, Southern California and Delaware, which has been dedicated to consolidated funded debt reduction. Additionally, we have successfully assigned approximately $50 million worth of sale-leaseback related rental obligations as part of these transactions. That is a total of $111 million of deleveraging progress enabled by our refranchising efforts.

With that, I would like to turn the call over to Gregg Kalvin.

Thanks, Julia, and good morning, everyone. Let me first quickly walk through key performance highlights for the fourth quarter of fiscal 2008 and then touch on our deleveraging process.

EPS for the quarter was impacted by a non-cash impairment charge of $171 million, primarily associated with write-downs of goodwill and intangible assets related to the Applebee's acquisition. In the fourth quarter of 2008, we completed our annual test for impairment of goodwill and indefinite lived intangible assets. Our analysis concluded the fair value of our IHOP and Applebee's franchise reporting units exceeded their net carrying value. However, the fair value of the assets assigned to the Applebee's company operated restaurants reporting unit was less than the carrying value. We then estimated the fair value of all of the assets and liabilities of the company unit as it had been acquired in a business combination. The result of that process was a goodwill charge of $114 million for the quarter, representing 100% of goodwill of the company units. In addition, we recorded an impairment charge of approximately $44 million related to indefinite lived intangible assets, specifically a portion of the trade name allocated to the Applebee's company unit. Again, these were all non-cash charges.

Excluding these charges, we were pleased to turn in not only a profitable fourth quarter, but also a profitable bottom line performance, for the first full year after acquiring Applebee's.

Turning to an important operating lever in our business, G&A, consolidated G&A increased to $182 million, reflecting a full year of overhead expense at Applebee's. This also comes in nearly $4 million better than our previous guidance for 2008 due to disciplined expense management. Consolidated G&A included approximately $12 million in non-cash stock compensation expense and $8.5 million worth of retention and severance-related payments for the full year.

Looking at our income taxes, our effective tax rate for the fourth quarter was approximately 13%. This is better than the third quarter level of 21%, primarily due to the decrease in our pre-tax book income. This was partially offset by impairment of nondeductible goodwill. Also, I would like to remind 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 $111 million for the full year 2008, a 4% increase versus the same period last year. This level of cash generation was higher than our previous guidance, primarily due to greater than expected one-time tax refunds related to the Applebee's acquisition received in late 2008, as well as higher than expected net gift card benefits in the fourth quarter. The IHOP business generated $16 million of cash from the structural runoff of principal payments related to its long-term notes receivables for 2008. During the same period, consolidated capital expenditures came in at the low end of our expectations at $32 million as compared to the same period last year. This level of spending was primarily related 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 2008. These factors produced consolidated free cash flow of approximately $95 million for 2008, which we define as cash from operating activities plus the receivables runoff, less capital expenditures.

Through fiscal 2008, we utilized available free cash flow to retire approximately $59 million in consolidated funded debt purchased. Additional uses of free cash flow during 2008 included the payment of our common and preferred dividends. Through a combination of refranchising proceeds, sale-leaseback and operating lease rental assignments, the use of free cash flow to retire debt, along with the retirement of short-term debt, DineEquity has reduced its leverage by approximately $500 million in fiscal 2008.

Now turning to our debt ratios, our consolidated leverage ratio as of the end of the fourth quarter was 6.77 times. Our leverage ratio benefited from the retirement of debt purchased opportunistically. Our debt service coverage ratios, or DSCRs, were three times for IHOP securitization on a three-month unadjusted basis and two times for Applebee's securitization on a three-month adjusted basis. Both our leverage ratio and DSCRs remains comfortably in compliance with our covenants.

Now I will turn the call back to Julia.

Thanks, Gregg. I want to expand on our debt covenant discussion. We expect to remain in compliance with our debt covenants based on our current plans. However, we have taken proactive steps to address those things within our control to ensure maximum financial flexibility going forward. We have already taken action on approximately $20 million worth of profit enhancements we detailed last quarter. Each $7 million of increased EBITDA represents an approximate 10 basis points of improvement in our leverage test. We are making material progress towards achieving the $50 million in cost savings targeted at the time of the acquisition. By the end of 2009, we expect to realize approximately $35 million in total G&A savings garnered in 2007, 2008 and 2009 as a result of our successful refranchising and integration efforts. These actions bring our 2009 expected G&A expenses into the range of $165 million to $175 million for 2009. So we have leveraged our core competency around disciplined G&A management, making great progress on the expense control front, which is an important contributor to our financial flexibility in the future.

We have also made terrific strides in bringing CapEx spending in line with our combined franchise businesses and expect expenditures to range between $13 million and $16 million in 2009. This gets us to a level of capital spending originally targeted for 2011, a full two years earlier than our expectation, while allowing for a generous amount of maintenance CapEx to service our remaining company restaurants as needed.

Two other guidance metrics for 2009 -- we expect cash flow, base depreciation and amortization to be approximately $100 million this year. And, consolidated interest expense is expected to range between $190 million and $200 million in 2009, approximately $40 million of which will be non-cash.

Due to the strength of the Applebee's and IHOP franchise systems, DineEquity generates a significant amount of cash each year to meet our obligations and comfortably run our business. We expect to generate excess free cash flow in the range of $99 million to $112 million in 2009. We expect to allocate a portion of excess cash towards opportunistic debt retirement, which we believe is a prudent step that is expected to maximize our financial flexibility and create value for shareholders over the long term.

We continue to have active negotiations for all of Applebee's company-operated markets available for sale with different parties with restaurant backgrounds and operating capabilities. We continue to believe that our 2009 refranchising goal of selling approximately 200 restaurants is achievable. However, we do recognize that closing deals is very difficult in the current environment and are working with several interested parties to overcome obstacles posed by the credit markets and weakness in the broader economy.

With these proactive steps and by executing our plan for 2009, we believe we will remain in compliance with our debt covenants. We also understand the sensitivities inherent in our business model and the action we can take to remain in compliance should the economic environment deteriorate beyond what we contemplate in our 2009 operating plan. We have maximized our financial flexibility in a prudent way and are now focused on moving forward in 2009, executing our strategic agenda for the Applebee's and IHOP brands. We are an experienced franchisor of restaurants with a proven expertise in revitalizing and optimizing brands. This is what we are good at and we plan to stick to our knitting to drive our business forward and meet our commitments in 2009, despite economic challenges. We did just that in 2008, and we plan to do the same again in 2009.

For IHOP, we expect system-wide same-store sales to range between positive 1% and negative 1% for fiscal 2009. This outlook takes into account a continuing challenging consumer spending environment, which is expected to be tempered primarily by compelling value-oriented limited time offers to be introduced throughout the year, enhanced marketing, promotion and media strategies, improved operational execution and a planned system-wide menu update.

Developments should materialize as at a similar pace to prior years, with franchisees and our Florida area licensee expected to open between 65 and 75 new IHOP restaurants in 2009 in the US, Mexico and Canada. And we will employ our service as good as our pancakes training platform and AB operator rating system to continue to drive operational improvements at every IHOP restaurant.

2009 promises to be an exciting year for Applebee's. We move into our second year of revitalization efforts, which will include the rollout of new menu items throughout the year, the strategic use of promoted value offerings, a focus on improved operations execution at the restaurant level, and enhanced marketing and media strategies. These brand and operational revitalization efforts are an important next step to begin to engage the guests and compete more effectively in this challenging consumer environment. Pending the results of these initiatives, and taking into account strong consumer headwinds, we expect Applebee's domestic system-wide and company same-store sales performance to range between negative 2% to negative 5% for fiscal 2009.

While we are primarily focused on enhancing the performance of existing restaurants, we expect franchisees to open between 30 and 40 new Applebee's restaurants in 2009, approximately half of which are expected to be developed in the US and the balance internationally. Margin improvement at company restaurants will also be an area of intense focus. We expect to deliver approximately 50 to 150 basis points of margin improvement for the full year 2009 by employing even greater management focus on cost control. Importantly, we believe we can achieve this without impacting guest satisfaction, which we successfully demonstrated as possible based on our improved guest satisfaction scores in 2008.

Finally, a system-wide effort to improve the operational performance of every Applebee's restaurant will be critical as we look to improve guest satisfaction. We expect to accomplish this through the utilization of an AB operator rating system implemented in the fourth quarter last year, similar to the one employed within the IHOP system. Additionally, our focus on ensuring that every guest leaves happy will be a central effort at company and franchise restaurants throughout the year.

We experienced a significant improvement across all key consumer measurements in 2008 and want to continue that momentum. In all, I am very proud of the progress we are making in revitalizing and restructuring the Applebee's business. We have a strong management team in place, a tireless employee base and franchisees who are dedicated to our vision of becoming number one in grill and bar. The resilient, sustainable momentum present within the IHOP system remains a testament to what an organization can achieve when it executes consistently and passionately towards a vision of becoming number one. It has been a little more than a year since we closed the acquisition of Applebee's. The economic environment has certainly changed and is undoubtedly a challenging one. Despite that, we delivered on our key commitments for 2008, most notably in regards to our refranchising goals and exceeding our guidance on fiscal metrics like cash from operations, G&A and CapEx spending, while taking steps to opportunistically reduce our debt levels. We will continue this effort in 2009 by focusing on those things we can control while remaining dedicated to our strategic growth agendas for both Applebee's and IHOP. I believe we are in a strong position entering the year and look forward to an even greater level of performance in 2009.

With that, we would be happy to answer any of your questions you might have. Operator?

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

I have a couple questions. I may have missed this in the presentation, Julia, but when does Applebee's plan to launch some of these new products?

Well, I said throughout the year, you'll see the new menu in April, and you will see the items throughout the year. So as not to be -- too giving away trade secrets, just think of it throughout the year. And the new menu, if you want to see something actually, like when you go into a restaurant, what's different, shoot for April. And we'll get something out in a press release form in mid April to let you know exactly when to go in. But you will see new food and new beverages come April, and then throughout the year, you will start seeing us advertise new product.

Will the new products that are advertised, will they be on that new menu or will they be an extension of some of the things on the new menu?

Both. Some of them will be on the new menu and some of them are -- think of it as, surprise!

Okay, great. And will there be new product platforms, new categories?

Yes. Now, you may not see all of that in '09, but you will see some of that in '09, and that will continue, frankly, for the next several years.

Okay. And then second question, Gregg, how much of the planned G&A savings for 2009 will be non-cash versus cash?

Well, we haven't -- we are not going to disclose that right now. It's a combination of obviously a cash/non-cash item. It's dependent on how the financial results play out over the year, what levers we have to deal with non-cash payments for certain items, if you will; for example, like stock-based compensation and things like that. That could be a significant non-cash item if we choose to pay that way versus in cash for compensation and things like that. So we don't have an exact number, but a portion of it could be approximately that. The total stock-based comp and depreciation numbers for the year will be about $26 million related to G&A. So a portion of that could be related to those savings.

Okay. Now, are those savings tied to the removal of -- so the savings are tied to some of the removal of the depreciation from stores that you refranchise?

Yes, absolutely. It is built into the sale of the 200 stores in 2009. The depreciation would be reduced in relation to the reduction of those stores.

Okay, perfect. That's helpful. And then lastly, and this is a question that is kind of out there, but I was just wondering, given that the bonds are trading at a discount, has the Company considered having franchisees buy the bonds at a discount and then use that face value of that bond to pay for some of the Applebee's stores that they may want to acquire?

I think the best answer is to say that the Company continues to look at any and all measures that we might be able to do. And certainly that is something that we are taking into consideration.

Would there be any restrictions from taking that approach?

I don't believe there to be, not from our -- are you talking about from our securitization?

Yes.

No.

Bryan Elliott, Raymond James.

Thank you, good morning; a couple of things. First, I guess, Julia, there seems to be some confusion. Could you remind everyone how long you have been running National Pancake Day and maybe contrast what you do from a -- collecting donations, etc., what Denny's did and just go through that, please?

I would be more than happy to. It would be my great pleasure. So this is the fourth year that we have really celebrated National Pancake Day in a system-wide event, where every single restaurant is participating across the country. And what IHOP does is between 7 AM and 10 AM -- 10 PM, excuse me, -- yesterday, if you walked into an IHOP, you were given, if you asked, a free short stack, a free short stack of pancakes. And in return we asked you at the front, there was a box, and we asked you to make a donation to charity. So whatever you felt comfortable in giving. And so that money, every stitch of it, gets collected this week and then we give all of it to the Children's Miracle Network or a variety of other charities. The large majority of it goes to Children's Miracle Network. And so it's our way of giving back to the communities for which we serve. So it's not just about giving free food, if you will; it's making a difference in the communities we serve. And if I had an hour, I would share with you some of the letters I get from Children's Miracle Network and some of the hospitals. It is pretty are heart-wrenching about saving people's lives and making a difference. It's really our way of giving back.

And could you maybe compare and contrast sort of -- assuming someone buys a coffee or an orange juice or a side item, as to whether you would view -- see the franchisees actually generating gross margin versus giving away an entire plate of food?

Oh, absolutely. They do extremely well. They look at this as an opportunity to give back, but lots of people still, the large majority, if you will, still buy a meal and/or multiple meals. It's this sort of this esprit de corps that you feel good about giving back. It's this notion of, I want to eat -- you know, my family of four doesn't necessarily want a short stack. So we absolutely post profitable days.

Very good, thank you. Also, it was asked earlier I think by Chris, but maybe help us understand a little better -- we had a pretty good margin year this year considering sales at Applebee's, and we are targeting some more savings despite negative comps, so -- which sometimes can lead to cutting of some muscle at the store level. Can you give us some help on understanding what areas of cost savings are out there, given the negative leverage from further comp declines?

Sure. Let me give my 50,000 foot view, and if Gregg feels like he needs to add more he can certainly chime in. I give all the credit to the operators and certainly to Mike. I think those guys have done a fabulous job -- Sam, Mike, the whole team -- in making certain that we are focused on the right things, not cutting for cutting's sake, or cutting into the muscle, which you suggested, but really leveraging every single dollar. And so part of that if you think about the middle of the P&L, they have done an excellent job on commodity, where we have really seen some of the commodities come down. They have really done a great job of leveraging that. They have budgeted better because we know what our calendar is going to be, so they have done a nice job of budgeting against that, knowing what that futures product is going to be a cost of. So they've done a great job in that.

And then in labor and management, some of the things we have talked about, Brian, that we were introducing at the end of last year has sort of really taken hold, which is making certain that every single dollar from a salary and bonus perspective we are absolutely maximizing. And they have -- not to give away too much, but we utilized -- at the end of last year we put into place -- think of it like a labor scheduling system that has really made a difference in terms of maximizing the service component, but really minimizing any costs that are unnecessary. And they have really looked at every single activity in that restaurant and tried to maximize it. So I give them all the credit in the world. And they are kind of on a roll that they started at the end of last year, and it just has been continuing. I couldn't be more pleased.

And to your question earlier, they're the first to tell you, we are not going to cut into the muscle. And they absolutely are not doing that. But more importantly than even that is, our guest experience and our guest results, what they tell us from a service component, a speed of -- has gone up significantly. So that is what I was trying to say my remarks. It's pretty remarkable that we've done all this cost-cutting, but we have been able to actually substantially -- not a small amount, but substantially increase guest service. It's about as good as it gets.

Alright, that's helpful. I wonder if you could address what impact you might be seeing in the short run at Applebee's, given the two-for-one deals from Friday's and I guess Ruby more recently and whether that is having any material and sudden impact in traffic.

Well, as you know, it just started. And when people do crazy things, I'm not certain with the result or the outcome. I think we are so focused on delivering to guests our substantially enhanced guest experience and the plan that we put in play, and I think the franchisees have taken a healthy attitude of, you know what? Let's not get into this price war. We have seen what happens in fast food. We have seen what happens in other categories. So we would rather continue under our plan, do what we know to be advantageous and let those guys duke it out in the free world. But we really -- it's probably too soon. I don't see an immediate reaction and I don't see the franchisees saying, let's go out there and do it, because to be honest with you, that has really been the underpinning long before we ever made the acquisition of Applebee's. It's all about their price value, their everyday incredible value. And so I think really focusing in on the everyday low value is what consumers are really honing in on, if you will, for Applebee's. And that is really part of our differentiation. So it's a lot like, if you will, the analogy -- excuse me for being shameless here -- but it's a little bit like what we saw with IHOP. When everybody decided to get in that cut a couple years ago, of discounting, we just stayed out of it and said, you know what? We deliver everyday low value. We don't have to give it away. And that really made a difference. So I think that's clearly our strategy to stay focused on today.

All right, thank you. Last question. I need to block out 18 hours to tie [Brian Vicaro] to his desk, so when do you think the 10-K will be filed?

Within the next day.

Today or tomorrow.

Steven Rees, JP Morgan.

Just on the same-store sales guidance, it looks like the fourth quarter trended down 4.6 at Applebee's and down 1 at IHOP. That's sort of the low-end of the full-year guidance range. Can you just comment on what gives you confidence that things will improve this year? Is it the trends you have seen year-to-date? Is it some level of pricing? Just sort of some more color there.

Two things. Can we take it separately?

Sure.

So on the IHOP side, certainly we are off to a good start. We had a very, very value-oriented promotion with all-you-can-eat. And we have seen the free refill coffee in the all-you-can-eat. So we've gotten off to a very good start with IHOP.

And I think secondarily, because we are so far ahead -- as you know, we are already working on 2010 and 2011 calendar -- we have a really high level of confidence in those items tested where they have done well. I think some of you may have seen, we released today our whole new program that launched with the new Loaded Country Hashbrowns, which I know for some of you, it's lunchtime, but the Ham, Swiss and Mushroom Browns, the Jack Cheddar and Bacon Browns, the Country Sausage -- these are just fabulous items. So, when you think about throughout the year for IHOP and the kind of value orientation in new items, we have a high comfort level. And we've got a great track record and those have tested well. So I think that gives us a lot of solace on the IHOP side, both from a differentiation and then also from sort of a breakthrough aspect of how we have done.

On the Applebee's side, I think you've both got an aggressive calendar throughout the year and this notion of new and new things, I think, gives us solace and confidence, along with -- and I'm sure this sounds a little bit contrived, but I am telling you, when you talk about substantially increased guest service scores and the guests reacting so favorably, I think that gives us solace. And then, lastly, we happen to think we've got the number one marketing person in the country with Becky. And I think Becky he is adding her own level of expertise to the current existing program, even enhancing it and making it that much better. And frankly, our guidance is being prudent. It's all those things combined between IHOP and Applebee's.

Okay. And then I guess most of the advertising I've seen so far at Applebee's has at least included some price point, like the two for $20 or the $9.99 steaks. But yet the industry traffic has gotten worse. So how important or how effective are price points going forward, or do you think there's more of an opportunity to say, hey, look, these are the changes we've made and sort of communicate that?

You know, it's a great question. I genuinely believe it depends on what you are marketing. I think there are some things that truly lend themselves to a price point on television, to scream value, and I think there are some other things, especially when you're talking about new, I refer to as sort of effective pricing, right? Because it never existed before, you have an opportunity to do what I call effective pricing. So I think it's a combination of both, and I think you'll see both this year.

Okay. And then I was surprised -- well, the 280 basis points margin improvement, Gregg, maybe you can just sort of comment on where exactly that came from -- food, labor, direct and occupancy, if you have that.

Well, a portion of it was related to purchase price accounting adjustments at the beginning of the year, essentially, that we benefited from depreciation. There was also cost cutting, as Julia touched on earlier, around the four wall store costs that then helped on that, for example restructuring of some compensation plans that we talked about in Q1. Those were the primary drivers of the number during the year.

I think as you recall, we said at the end of first quarter 2008, we made some changes to the bonus plan. We made some changes to several of the other line items in vacation accrual, just some basic what I will call cleanup for the business. That certainly rolled throughout the year. And then as I said towards the back end of last year, we made some what I will call really strategic decisions on the labor scheduling and really creating efficiencies. So it's almost really in every line item. But don't underestimate, some of that was from the accounting work at the beginning of last year.

Yes, so the 50 to 150, that's pure operating improvement, or is there more accounting that's going in there?

The 50 to 150 basis points for '09 is all coming from real, honest-to-goodness savings. There is no accounting treatment in any of that.

Okay. And then finally, just on the refinancing -- a franchising, I know you don't want to comment on the time line, but it sounds like you have assumed the full 200 to get to your new G&A outlook. So should we be thinking about it pretty lumpy, more second half loaded? And then I think previously you commented not to expect the per-unit sales prices in '08, that those would be higher. Is that still the case, or have you seen any changes there?

I think the way -- so let me take your questions one at a time. So in terms of the actual how should you think about those 200 units, as I've mentioned before, it can take as much as four to five months to close, because we have to transfer all those liquor licenses, we have to transfer all those leases. So I don't think you should think of it as one day we are closing 200 units. I think you should think about a little lumpy is probably a better way to think about it. And I would think about that more focused on the back half of the year than the front half of the year.

In terms of the proceeds, I am really hesitant to say anything until we've got the final locked and loaded. I think we have mentioned before to you that it is our intention to disclose these sales once we've close an APA, an asset purchase agreement, and there are no financial contingencies. When that happens, then we'll obviously disclose all that.

Let me just add one point, that on the G&A range that we gave on the guidance, hypothetically if we don't sell a restaurant during 2009, we still come in projected at the high end of that range. So I think that's significant from a cost-cutting perspective.

Michael Gallo, CLK.

Question I have is on the buying cooperative, which you just set up. I was wondering how quickly you might start to see some savings from that, and if you have baked any savings into the assumption of margin improvement at Applebee's company operations. Thank you.

So the cooperative was formed a couple of weeks ago. We are actually giving them free rent or a discounted rent factor, if you will, in Lenexa. So they are there in Lenexa. They are working very diligently on contracts. Some were already done for the year, some they are renewing. A lot show up in second, third and fourth quarter. We talked about for our guidance for 2009 that we said a commodity increase for both IHOP and Applebee's would be less than 3%. Part of that is baked in from the cooperative. So in terms of timing and sequencing, I think they will be in a much better position to talk about that as the year progresses. But clearly we have baked in some savings based on what we knew they would get this year.

Great. And then a question on what you expect the operating income impact from the 53rd week to be in 2009, and I assume that the 53rd week will be in Q4?

It will be.

Yes, it's in Q4. The actual number -- I don't -- yes, I'm not sure we can get it.

We would have to get back to you on that.

Yes. Why don't we take a look at that and get back out to you guys, because I don't know if that has been delineated or broken out that way. We will put something out to you.

Okay, helpful. Thanks a lot.

Tom Forte, Telsey Advisory Group.

I had two questions. The first one was, I wanted to know, on your comments on your confidence in staying within your debt covenants for 2009, what the relationship was between that and the projection for 200 re-franchised Applebee's stores, and if that was contingent on a certain number, 100 plus, or just generally what the relationship was between the two.

And then second, I wanted to know your opinion on store closures, both for the casual dining industry, and then also Applebee's-specific as far as lease expirations or those locations that may not have enough free cash flow to pay the rent.

So let me answer the first part of the question. We don't need the 200 restaurants to be sold this year in order to meet our debt covenants. That we don't need. Certainly our plan includes that. The other issue is on the closure of restaurants. We always have a de minimis number of restaurants that we put in our plan that are going to close because their lease is expiring. It is de minimis and is insignificant at both brands.

However, having said that, when you ask as you look across the country and brands are either closing or shuttering, because we are so large, it doesn't have an impact necessarily on the system, but in that particular area of the country -- and I'm making this up now, so if you see 10 restaurants close in Chicago, you may see the sale of restaurants -- the sales in those areas in Chicago go up for either IHOP or Applebee's, a small percentage because they're obviously picking up share. But as a Company, you're not seeing enough slippage will make a difference for the system, at least at this point. Gregg, you don't have any other differing point of view, do you?

No.

It's just not a large enough number to make a system difference, but clearly, if you see a particular area of the country where a small regional chain or a group of restaurants or a franchisee went down, you will see that particular restaurant or restaurants see a pick up.

[Chris Siffel], [Blue Lion] Capital.

I have a quick question, more of a housekeeping item on the cash flow statement. There's a $55 million swing in deferred revenue in the fourth quarter. Can you maybe break out what that is?

Generally it's primarily related to gift cards and the swing between 2007 and 2008 is what drives that the most, the gift card sales predominantly at Applebee's. So depending on how much cash we collect in the predominantly after Thanksgiving and how much redemptions there are, will drive that number or that swing in the cash flow statement. And that changes quickly in Q1 also as redemptions are made from cash collected from gift cards in Q4.

Okay. And a question on the impairment charge, the $171 million. Were there components in that in terms of what was written off that would have been in G&A had there not been an impairment taken?

Well, let me give you the components of them. The components of the $170 million are roughly $114 million of goodwill related to the Applebee's company operating unit. Then there was about approximately a $45 million trade name impairment. And the rest were related to impairment of the stores themselves as we have indicated the value during the last quarter of the year and whether write-downs are appropriate on that. So that's kind of how it foots the $170 million. So those numbers essentially maps your question straight to an impairment line item separately on the P&L and don't go anywhere else.

And what was the $45 million?

Trade name. The $800 million Applebee's trade name --

Trade name impairment.

Yes, that was allocated in purchase accounting, is now reduced by approximately $45 million.

And there are no further questions at this time. I would now like to turn the call over to Ms. Julia Stewart for closing remarks.

Well, thank you, operator, and thanks for your questions. We will get back to you on the one outstanding question, one way or the other, on the profit in the 53rd week. And we look forward to talking to you at the end of our first quarter. Thanks again, take care.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.