Dine Brands Global Inc (DIN) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 investor conference call. My name is Keisha and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the conference over to Ms. Stacy Roughan. Please proceed.

Thank you for participating on DineEquity's second quarter 2009 conference call. Today with us from management are Julia Stewart, Chairman and CEO, Jack Tierney, CFO, and Greg 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 to you evaluate such forward-looking information in the context of these factors which are detailed in today's news release, as well as in our most recent 10-Q 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 for your viewing on our IIR website at DineEquity.com. The document can be found under the calls and presentations sections of the IR site posted as supporting materials for today's webcast. If you haven't already done so, we encourage to you 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 release today which is also available on DineEquity's IR website. Now I would like to turn the call over to Julia Stewart.

Thanks, Stacy, and good morning everyone. Today we'll provide you with a quick overview of our second quarter 2009 results, update you on our strategic agendas for IHOP and Applebee's, and then touch upon our franchising outlook for Applebee's company restaurants and our continued efforts to maximize our financial flexibility.

Let's cover some of our key performance factors for the second quarter 2009 starting with same store sales. IHOP system-wide same store sales performance turned slightly negative with 0.6% decrease for the second quarter 2009, compared to the same quarter last year. Our performance reflects strong limited time offers during the quarter, including Loaded Country Hash Browns and Strawberry Festival supported by national advertising. Our performance was primarily impacted by the challenging economic environment affecting consumer spending as well as difficult comparisons to prior year, particularly due to increased activities around IHOP's fiftieth year celebration last year.

Year-to-day IHOP same store sales results increased 0.7% in line with our full year expectations. We remain confident in IHOP's strong value position with the guests as we continue to perform at higher levels than the competitive set and we're delivering a record level of new store week openings as we continue to meet our full year goal of 65 to 75 new IHOP restaurants.

Turning to Applebee's, Applebee's system-wide domestic same store sales decreased 4.3% for the second quarter 2009 compared to the same quarter last year. Applebee's marketing efforts during the quarter included our two for $20 value offering which included a newly introduced lineup of Real Burgers as well as secondary advertising messages around Pick 'N Pair and Applebee's carry out program, Carside to Go. While we faced significant competitor discounting during the quarter, we continued to perform at a higher level than most of the competitive set as we navigated the challenging economic environment. Year-to-date Appliebee's system-wide domestic same store sales decreased 3.6%, in line with our full year expectations.

Now there's no doubt that the consumer landscape has become more challenging since the first quarter. After April and May's performance which were relatively similar to first quarter levels for both brands, we experienced difficult same store sales comparisons during the last few weeks of June. We believe this weakness is being felt across the competitive set in both casual and family dining and is not unique to DineEquity's brands. Looking at the balance of the year, we remain focused on those things within our control and committed to our strategies to energize the IHOP and Applebee's brand.

IHOP has a strong lineup of limited time promotions planned for the balance of the year that will offer exceptional value to our guests. At the end of August IHOP is partnering with the National Football League to launch NFL themed menu items that will be available only at IHOP restaurants for a limited time. Our marketing activities on TV and on the Web will feature NFL super stars Donovan McNabb of the Philadelphia Eagles, and Larry Fitzgerald of the Arizona Cardinals. It's a terrific strategic partnership and a promotion and a winning combination of American favorites - IHOP and the NFL.

From an operations perspective, IHOP's A/B B operator scores remain over 90% as our franchisees executed the highest level of operating standards and delivered on our guest promise of service as good as our pancakes. New franchise restaurant development in the first half of the year has led to a record level of new store week openings year-to-date, and this pace continues as IHOP remains confident in meeting our goal of opening 65 to 75 new franchise restaurants this year.

As part of our strategy to make the IHOP brand more acceptable to guests for the first time, we have a third party distribution partnership in place for IHOP gift cards to be sold at retailers such as supermarkets and broad line retail stores. Similar to the program Applebee's utilizes. This will expose new guests to the IHOP brand and remind current guests to visit more often. This additional awareness will keep IHOP top of mind for consumers in more than 20,000 new retail locations where IHOP gift cards will be available for purchase.

Just last month, Nation's Restaurant News ranked IHOP as number one in family dining for the second year in a row. I could not be more proud of the team, our employees and franchisees. Now with the addition of Gene Birch as President, I have every confidence that IHOP will continue to widen the competitive gap and create an insurmountable lead in family dining.

Turning now to Applebee's, we believe there is a smarter, better way to approach value in this environment. Applebee's strategy centers on value with new food news. We look to evolve two for $20 featuring the pipeline of new menu items slated for introduction for the balance of the year. This includes our new Barbecue Chicken Salad which launched nationwide yesterday as well as numerous new items in the coming months. Recently completed proprietary consumer research indicates that Applebee's has built meaningful brand equity on our two for $20 offering. However, we are watching this closely and will continue to leverage our proprietary research to develop new value programs and remain competitive. We will also test additional differentiated value offerings to build our pipeline of new offerings.

In addition to these short term moves, we must keep our eye on the long-term. And while discounting and buy-one-get-one strategies may drive traffic in the short term, we believe such moves are ultimately dilutive to margin and detrimental to the business over the long-term. Instead, our strategy focuses on differentiating the brand through a robust new product pipeline, re-engineering and redesigning our menu, building our value proposition and evolving our marketing efforts in a comprehensive cohesive way.

Turning to operations improvement, as of the end of the second quarter 2009, approximately 80% of Applebee's domestic franchise operators achieved an A or a B score. This is up from approximately 73% in the first quarter 2009. Our franchise operators. with the assistance of the franchise operations team. have worked diligently restaurant by restaurant to reinforce the behaviors that drive guest satisfaction, and we are starting to realize the benefit. Our year-to-date guest service scores are significantly better than that experienced in any prior year.

In these ways, we have made great strides to energize Applebee's and look forward to continuing to enhance our marketing, menu and operational efforts throughout the year. By remaining focused on our key strategies, we are setting Applebee's up for success now and in the future. As the economy turns, Applebee's is prepared to lead the way.

Jack will touch upon our strong company restaurant operating margin performance at Applebee's in a moment. However, I want to knowledge that the team continues to deliver sustainable margin improvement and is doing so while not sacrificing the guest experience; which we are very pleased to see.

Finally, turning to our franchising efforts, we remain completely committed to moving Applebee's towards an even more highly franchised system, but we will only enter into agreements that make sense for our shareholders. We have no need to sell our highly valuable restaurant assets for less than full value in order to achieve our long-term goals. As you know, progress and bringing transaction to say fruition has been greatly challenged by the lack of available financing.

But another factor, a positive one, has come into play and led to a somewhat extended deal process in the past quarter. As restaurant margin performance has significantly improved over the past six months, we reassess the performance of our restaurants as part of our continual P&L review to ensure that current level valuations adequately reflect this profit improvement. Interest from perspective buyers remains strong, and we continue with active negotiations for every remaining market. This includes several large multi-market deals contemplated in the current transaction pipeline.

Although announcing a transaction remains possible this year, we now believe it's unlikely that a transaction could close in 2009. This is due to the length of time required to process a transaction of any material size necessary to meet our previously announced goal of selling approximately 200 Applebee's company operated restaurants before year end. We are operating one of the most challenging periods the credit markets and the broader economy have ever seen. As a result of proactive steps we've taken over the past yea,r we possess the flexibility to ride this out and wait for conditions to improve.

Again, we will only pursue transactions that make sense for our shareholders. Now for a more detailed discussion of our financial performance for the second quarter 2009, I'd like to turn the call over to our CFO, Jack Tierney.

Thanks. I would first like to summarize a few key points for the second quarter. We reduced year-over-year G&A expenses by $15.3 million. We improved Applebee's restaurant operating margins by 130 basis points. We reduced interest expense by $5.6 million. And we increased total sales in the IHOP system by 3.6% while limiting Applebee's decline to 4.2%, in line with our guidance.

The results, earnings per share adjusted for one time gains and charges of $0.74 versus $0.02 in the second quarter last year, and a clear indication that we are on track to deliver our plan for improved profitability and position DineEquity for accelerated growth when economic conditions improve.

I'll now expand on the key drivers behind our second quarter performance. First, G&A expenses are down $15.3 million as the result of franchising 108 company operated restaurants at Applebee's last year as well as due to integration synergies and the cost reduction initiatives that we have been working on. These improvements are in line with our guidance, and we have reiterated our expectations for the full year of $165 million to $175 million in G&A expenses despite holding more company operated restaurants than previously planned.

Turning to Applebee's, by focusing on our restaurant margin initiatives we increased operating margins by 130 basis points to 14% from 12.7% in the second quarter last year. This improvement was achieved primarily from better labor costs ,which as a percent of sales declined 130 basis points to 33.8% versus 35.1% last year. Key drivers of this improvement included higher menu prices taken in previous quarters, efficiencies in labor and management staffing, lower compensation expense and favorable employee insurance costs. We are confident that our margin improvement is sustainable and have increased the range for our full year guidance to 13.5% to 14.5%, or an improvement over last year of 180 to 280 basis points. The actual margin will, of course, depend on year over year same store sales.

You should also note that there was a slight seasonality in Applebee's business that produces higher margins in the first half than in the second half. Margins are higher in the first half because sales are generally higher in the first half. Gift card redemptions are at the highest level in Q1, and so Q1 normally will have the highest margin. Also, there are more holidays in the second half than in the first half, and this tends to dampen sales and margin in the back half of the year.

Interest expense is $5.6 million better than last year, primarily as the result of paying down debt. In the first six months of the year we reduced securitized debt by almost $130 million. Our effective tax rate for the second quarter was 31.8% and we now expect the full year rate to be 33%. The year-to-date results are essentially a reflection of the second quarter. On a year-to-date basis, G&A expenses are favorable $15.7 million. Restaurant operating margins are up 300 basis points, of which about one-third is due to refranchising and other transitional activities that reduced the margin in 2008. To clarify, this has no impact on the 2009 margins.

Interest expense is down $7.8 million and total system-wide sales at IHOP are up 4.6%, while Applebee's are down 3.4%, in line with our guidance. We continue to believe that we are on the right track and have positioned both of our brands for accelerated growth once economic conditions improve.

Moving to cash flow, there are a few items that I would like to draw your attention to. First, cash from operating activities totaled $61.5 million in the first half. As Julia mentioned, we have not franchised a number of restaurants previously planned for the year, so cash flow will benefit from holding these stores longer than our original guidance contemplated. As a result ,we have increased our guidance on full year cash flow by $15 million, or in the range of $115 million to $125 million. Second, free cash flow was $54.3 million in the first half of the year. You should note that we have updated our free cash flow definition to include preferred dividends.

The IHOP business generated $8.2 million of cash from the structural run off of principal payments related to its long-term notes receivable in the first six months of the year. Capital expenditures during the first half of the year were $5.9 million as compared to $23.2 million last year. Capital expenditures last year were unusually high through June because of the opening of Applebee's new headquarters and the opening of new company operated restaurants. Year-to-date 2009 expenditures are in line with our guidance of $13 million to $16 million for the year.

During the second quarter of 2009 we reduced securitized debt by $42 million, mostly from open market purchases. As I mentioned earlier, we have retired almost $130 million in securitized debt in the first six months.

Now turning to our debt covenants, our consolidated leverage ratio or adjusted debt to EBITDA at the end of Q2 is 5.95 compared to the current threshold of 7.5. This covenant will reset for the last time this November at 7.0 and stay at that level until maturity. Our debt service coverage ratios were 3.41 for IHOP and 2.89 for Applebee's, compared to a minimum threshold of 1.85. With the steps we have taken to pay down debt, we remain comfortably in compliance with our covenants.

Primarily as the result of paying down debt, we now expect full-year interest expense to range between $185 million and $195 million, as compared to our previous guidance of $190 million to $200 million.

So overall, we are pleased with the results of the second quarter and the first half. We have a solid plan in place to achieve our improved guidance. And now I will turn the call back to Julia for some summary comments.

Thanks, Jack. As Jack highlighted, as of the and of the quarter we remain comfortably in compliance with our covenants, operating well below the 7 times ratio our covenant requirements reduced to in November 2009. Clearly, our aggressive use of free cash flow and proceeds from the sale of company restaurants to retire debt over the past several quarters has benefited our position. We plan to continue to retire debt with available free cash flow, as we believe this is the best use of cash for the foreseeable future.

And while we expect the delayed sale of company operated Applebee's is only temporary, we believe we have the necessary financial flexibility to remain in compliance with our debt covenants while continuing to operate these restaurants, even for an extended period of time. This assumes that our current same store sales and margin run rate remain fairly stable and excludes any unforeseen adverse material event that would significantly impact our operating fundamentals.

That said, as soon as financing conditions improve, we will quickly move to close transactions and get Applebee's company markets into the hands of experienced franchise operators. Selling company operated Applebee's restaurants remains a strategic imperative for the company and we are not wavering from our commitment to transition the brand to an even more highly franchised system.

In all, we are being as thoughtful about the needs of our business in the longer term as we are diligent in the near term. We have maximized our financial flexibility in a prudent way and filed a universal shelf this morning with the SEC to ensure we have ongoing flexibility. For the balance of 2009, we remain committed to executing our strategic agenda for the Applebee's and IHOP brand, and continuing to successfully manage our business in the face of challenging consumer and competitive conditions.

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

(Operator Instructions). Our first question comes from the line of Chris O'Cull with Suntrust.

Good morning, everyone.

Good morning, Chris.

A couple questions. First, Jack, on the last call, I know you commented that two-thirds of the 470 basis point improvement that you guys saw on the company restaurant margin during the first quarter was sustainable, implying much more improvement than the 130 basis points we saw this quarter. Could you help reconcile the factors that changed the results there or the expectation, at least?

Well, as I mentioned, first quarter we do have the highest margin because we typically have the highest sales. And if I could just give you some numbers here, the first quarter of this year the total sales at the Applebee's company operated restaurants were about $236 million. And in the second quarter at about $218 million. And that does drive a lot of the difference in the margin between first quarter and second quarter.

Okay. I know you mentioned you saw the labor cost improvement, which is impressive. I would think you also would have cost of sale improvement, especially in light of where commodities are. And Julia, I don't know if you can comment a little bit about the benefit you may have seen from the Real Burgers falling under the for two for $20 promotion , if you saw any benefit from that as

Yes, we talked a lot about the COGS and here's the issue. You do have some slight inflation, although we are hoping as the year progresses and in 2010 we are able to do more from a co-op perspective, but mix did drive into the two for $20. If you add a little bit of inflation and the mix, the net/net is it was flat. I mean, the truth of the matter, is year over year COGS were basically flat in second quarter. Some commodity increases, some improvement if you will on the mix. but all in all it was flat. My hope is as certainly the year progresses and we get into 2010, we will be in a better position to see that increase.

I talked a little bit about that last quarter. That I thought that we wouldn't probably see some real improvement until the latter part of this year, the first part of next year. Hang tight. I think will you see some of that improvement coming up.

One last question, that was helpful, thank you. One last question related to last year, I know -- I doubt either brand probably was able to get the quality of media buys that they had hoped because of the Presidential election and Olympics. Should we expect greater GRPs in the third quarter this year and potentially could that help the year over year weights and same store sales?

I don't think you should plan on that. I think what we are seeing is the buy is the same. In other words, we made the buy at the end of 2008, and for all of 2009 that buy may have some topside to it. So you may see some free spots in the NFL. You may see some free spots throughout the year. We are getting a lot more credit and we are getting some efficiencies. But I think in terms of total T RPs, I wouldn't go there. I think it's more about credit and upside, fill in.

I think the efficiency -- it will be interesting to see at the end of the year if you added up the TRPs how many more it is versus we just got make goods, we bought eight times in -- American idol is a good example, and we got ten spots. I think it's more additional efficiency as opposed to a total number of TRP increases. Be interesting to see when we go to the up front by which is coming up here in the next 45 days. Interesting to see if that will be a flat increase for 2010 or we will just see more efficiency again. I will know on the next call whether or not it will be a difference for 2010.

For 2009, I think it has everything to do with efficiency and improvement, but not necessarily year over year TRP increases.

Okay. Great. Thanks, guys.

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

Good morning. Just wanted to confirm first, Jack, that there were no changes in the depreciation and other non-cash things at the Applebee's company stores.

That's right, Brian. In 2009 there is no changes.

Okay. And also, Julia, if you could maybe just drill down a little more into your thinking on the shelf registration and potential use of proceeds?

Yes, as I said all we did was file a universal shelf. There is no offering being made at this time. All it does is provide for maximizing flexibility and provides the opportunity to access the market when and if it makes sense to do so. But no decision has been made by the Board ,and if you refer to the shelf, it talks about the uses of proceeds.

Okay. I didn't get a chances to read that, okay. Maybe also just a little more color and your thoughts on what the sales environment is and what you really think is happening, were there any geographic dispersions late in the quarter when sales slowed, any additional sort of information you could share on the sales the last six or eight weeks?

Well,, we don't disclose in our inter-quarter, but I think the best way to describe it to you is there is no question no matter whom I spoke to whether it was in retail, whether it was in restaurant, June was a tough month. Do I believe that's necessarily going to transpose for the balance of the year? It's anyone's guess. What I do think is what I said on the script.

I have very strong feelings about the fact that I think the approach we are taking is far more prudent for our business for the short term than the long-term. We are not giving it away. We are not diluting our margins. If you talk to franchisees, they would tell you, we've got strong operating results. This is really all about making certain we position these brands for the short term and the long term in terms of value. And that's why we reiterated guidance, Bryan. We didn't change our guidance on either brand because we feel confident that the plans we have in play sustain our ability to sort of survive all that unused shamelessly the word, nonsense, about giving it away. That just doesn't do any of our businesses any good long-term.

So I think the plans we have in place keep our guidance strong, don't see any reason to change it. I mean, that's as much as I can say without getting in our inter-quarter. Again, I think the real focus I gave you and even kind of gave you a sneak underneath the tent of things we are doing coming up, are all good things that really get the brand out there.

I still can't believe we got a promotion with the NFL for IHOP. That really goes to show you that II think people see the cache of the brands, and I think you will see more of that with some things we have coming up with Applebee's I can't disclose. I think these brands attract a really positive halo in terms of, they are good solid brands and we don't have to give it away. So that's my hope for the short term and the long-term.

I tried to answer your question without talking about inter-quarter. But I think the fact that we didn't revise guidance tells you that we feel pretty confident we can sustain our level of sales.

Thanks a lot.

Thanks, Bryan.

Your next question comes from the line of Steven Rees with JPMorgan.

Just to follow up on Bryan's comments about the promotional environment. It seemed to us that May looked to be sort of the peak of the give aways that we were seeing from some of the national competitors. I guess, one, do you agree with that, have you seen it at all stabilize in June just from a promotional sort of competitive environment? And I guess if that is the case, I'm curious why you think June slowed down are relative to the other two months which looked to be pretty solid.

One of the things you have to be careful of is in our industry the large majority of the brands aren't national chains, they are regional players and they are independents. If you look around the country and you look at some of these national chains, they are having just as difficult a time as anybody else. We see a lot more of the regional chains. You may just see the national brands, but if you really think about it, in both categories there are a lot of regional players and independents and they are fighting for their lives as well.

I would argue the couponing activity has not decreased. It has increased as regional players try to figure out what little advertising they have how to get it on the air and expound the virtues of $5.99 or whatever the case may be. I don't see that necessarily slowing. I think the real advantage that we have and I tried to articulate that, is our actual brand cache, and both these brands and the notion that we are creating value.

The other thing, and I really believe this, I don't know anybody building 65 to 75 new units in the United States with maybe one exception. I think it really is a tribute to our brand and our franchisees and their belief in our future that we are growing substantially on the IHOP side. And at the Applebee's side, people are really hunkering down on the franchise side and waiting for the remodels such that we can really start activating the brand in a very, very meaningful way. That's our fault as the franchisor, that we haven't produced that remodel program which we are doing as I said early 2010. But all those things combined, to me, say we are in a better position for the short term and the long term, and let everybody else fight it out in this couponing.

It's not having a significant impact on us as of yet, and I think as I mentioned earlier, especially in two for $20, our priority research says we have a brand opportunity here. We own two for $20 that really is working in our favor.

That's helpful color. Just on the shift in strategy -- the temporary shift in strategy to hold off on the sale of units or slow it down from the original two to three-year time frame, I guess I'm curious from an organizational perspective how comfortable you are today with your current infrastructure to support what will likely be an extended period of time with these company units. How should we be thinking about G&A in 2010, it doesn't need to grow from 2009. And also from a capital spending perspective, is sort of the $13 million to $16 million sustainable again in 2010 if and when these units don't get sold?

Let me be clear, I never said we were necessarily extending two to three years. I want to be crystal clear there. We are working on this every day to sell virtually all of these 400 restaurants. Let me be clear. It is still absolutely our intent. I don't think we can close a deal by the end of 2009 because it takes so long to transfer liquor licenses and the leases. But I have a pretty high confidence we may be able to announce a sale before the end of 2009.

The reality is we absolutely have the capability to sustain keeping those restaurants in our sort of our purview. And from that a G&A standpoint, you may see a slight uptick because we have to do some remodels if we hold onto them in 2010 from a Capex standpoint. But I don't see any major increases from a G&A perspective. If anything, when we sell, obviously you are going to see the G&A come down. But I would be very careful about automatically assuming we are hanging onto them for the longer term. All I'm trying to do is reassure you we can and it doesn't create any issues on the covenants.

But we are absolutely focused on selling those restaurants. The only increase you would see if we own them into 2010 would be a de minimus increase in Capex that we would have to do probably 25, 30 remodels, but it would not be significant.

And finally, the 3% pricing in Applebee's, can you talk about how long that will last, if it rolls off here some time during the year. And sort of your thoughts on pricing. I know there was some catch-up pricing initially between the companies and franchise units, but your thoughts on pricing power as you end the year given current traffic trends?

It rolls off in fourth quarter 2009. I don't know if I want to go -- predict what the pricing, if any, would be in 2010. I could probably be de minimus. There is still a gap between where the company operated restaurants are and the franchise operator restaurants are on pricing. I don't know if we want to go there. We've certainly shrunk that gap between franchise and company, but the 3% rolls off in fourth quarter. And if you ask me in first quarter 2010, I will have a better handle on whether or not there's even any pricing left to take.

Perfect. Thanks very much.

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

Good morning. Most of my questions have been answered. Just had a question on the G&A. Obviously, it was much lower in the quarter than it had been running. Given the guidance for the year, it seems like it will tick up somewhat in the back half. Was there any timing differences or things that shifted out of the second quarter from last year? Because even though you were controlling costs well, it seemed like it was a more significant reduction than I would have expected. Thank you.

No, I don't think there's any -- I mean some of this is timing related. As you know, in the third quarter 2009 we have our two national conventions. End of September, first part of October, we have the Applebee's and IHOP conventions. That's always a major expense for us, those two conventions. So some of this is timing related and year end additions, sometimes we'll have costs that come in at the year end. But we do expect to be at the low end of guidance. And so that's probably the best news I can give you.

But, no, I'm looking around the room. None of us are thinking there's anything that's extraordinary. We are just really focused on, I think we said that before. And remember, I think we told you in first quarter, we put some initiatives in place at the end of 2008 which serve us well through 2009.

Great. And then just a second question for Jack, I was wondering what impact you had year over year on the Applebee's company operated margins just from the refranchising changes, either units, year over year, that lower margin that weren't there, or just effects from accounting treatment on the sale lease-bac,k and how much those impacted the company operated Applebee's margins year over year?

It was very minor. Of the 130 basis point improvement, I don't think it was more than 15 basis points.

Thank you.

Our next question comes from the line of Tom Forte with Telsey Advisory Group. Please proceed.

Great, thank you very much. I had a couple of questions. The first one was on financing. So on a sequential basis last quarter versus this quarter, when you think about the ability for franchise operators, both experienced and unexperienced, to get financing, would you say that the conditions have improved, stayed the same, gotten worse?

I would say slightly better. Some of the banks, the big boys, are starting to talk about the fact that they might loan money. There is a little opening that we've seen with some of the -- is that a fair statement, Jack.

Yes, it is.

Some of the banks that we've started speaking to, at least they are talking about lending money. I guess that's the good news. There's always been private equity. Private equity has always been out there. It's at what price they are willing to loan the money and what the down payment is. A lot of this isn't necessarily that, as I said before, people can access the capital, it's whether they are willing to put 40% down and pay the interest rate. It's a combination of issues. I would say it's slightly opened up this quarter. Certainly, that's what the banks are saying. They are more open. They are not coming out in droves, but I am seeing a slight improvement.

Two other questions. Have you indicated or would you indicate the percentage of sales you are getting now from two for $20 and how that's trending? And then when you think about, I think you mentioned offering or testing other value efforts. How do you think about low price points? Because I thought that one of the advantages of focusing on the two for $20 versus some of the competitors that say $7 or $5, is it improves the set of the brand.

When you are thinking about some of these other value initiatives, how you are thinking about price points. And then really quickly, last question was wondering if you were happy with the results of the dinner day part advertising for IHOP?

Okay. So let me take those in order. The first one was, how is two for $20 doing. And as a sales mix, it was 19.5% of the mix. There is no question consumers are trading many of, not everybody, I mean it's 20% so there's still 80% going into Applebee's and having something other than two for $20. Bur 20% of a sales mix is pretty high, relatively speaking. I've been in this business for a long time, that's a pretty high sales mix . And that just goes to show you there is a percentage that are very much interested in the deal, if you will, and if you think about it when we were using Real Burgers in the promotion, it went as high as 23%, 22.4%.

So there is no question that we are driving -- certain people are desiring that value proposition. So that's good news in my mind that for the folk out there that need a value message we are certainly fulfilling it. But I also want to remind you that 80% are ordering something else. So that was the mix question you asked. There was something in between

The in between was on lower price points. I think you mentioned testing some other value initiatives, and I'm curious on when you are thinking about those initiatives are they going to be lower price points specific, or do you also do them within a bigger promotion so as not to be focusing on a $5 item or $7 item.

The R&D team and the marketing team at Applebee's are doing a marvelous job of both. They are looking at value engineering products and they're also looking at products that are what I call effective pricing, because they never existed before on the menu and they deserve a different treatment of pricing. Remember, we can only price for our company restaurants.

We can offer ranges for franchisees but we cannot edict pricing on the franchise side of the business. No one can do that. So we give ranges and we tell them what is effective pricing, if you will, for those items. But the team has done a marvelous job of looking at both, the low end for what I call value engineering products, and that large swath of just somewhere in between. So for the next several months think of us as doing both.

But in terms of going on television and giving it away or charging some ridiculously low price, again, that's not the strategy for Applebee's. Ours is much more in that value equation and clearly two for $20 has resonated with our guests. That's sort of the broad brush.

On IHOP for the dinner, we knew going in it was going to take some time and efforts and the franchisees had been very supportive of us, not just putting our toe in the water but making a big splash about getting into dinner in a much bigger way at IHOP, and it's going to take sometime. I would tell you that our results are about what we expected at dinner. I think it's going to take sometime to work that through.

But ask me that question in a couple of quarters next year and I think we will start to see the movement just like we did in lunch. Just to refresh everyone's memory, when I got here, virtually all the mix was in breakfast. And today, about the same amount of breakfast and lunch sales, from a sales perspective, are at IHOP. That's from really focusing on doing a good job, not just at breakfast, but at lunch and dinner. Now eventually, it's our goal to take that same increase at dinner. It takes time because you have to convince people that it's more than just breakfast and lunch. But I have every confidence, and the kind of things that I'm telling you they are doing will help that giving a notion. When I think of NFL, I don't think of breakfast, I think of dinner, so I think will you see some of that.

Thank you.

Our next question comes from the line of Michael Wolleben with Sidoti & Company. Please proceed.

Good morning, everyone.

Good morning, Michael.

I had a quick question on one comment you made, Julia. I know that you've said in the past you are more than comfortable going through 2009 without selling any units. But did you allude to the fact that you guys could make it through 2010 without selling any units and still be comfortable with your covenants?

I said 12 months I think is what I said, yes, in the script. So you could infer that.

Okay. And then also on the covenants here, now that you guys are below that six times level on your adjusted debt to EBITDA, does that free up the use of some of this cash that you guys have, and any thoughts on what to do with the continued free cash that you have?

I think we've been, and maybe I haven't been clear enough, I apologize for that, our focus is very much taking excess free cash flow and opportunistically paying down debt. That's what we said. Was that your question?

Yes, but being below that six times level, I think there was discussion in previous conferences calls that it does free up some things that you could do as far as retiring some of that preferred?

It may be, but at this point we are really focused on the debt and not the preferred.

Okay. Then just lastly here, are you guys starting to see any of the benefits from your purchasing co-op in those Applebee's margins?

I talked about that earlier. It's probably too soon. They've, just to be shameless about them for a minute, they've done a great job, 100% of the Applebee's system is now in the co-op. 93% of the IHOP system, they've been very focused on some key contracts, beef, poultry, that kind of thing. And they are working on some of the other key contracts for the balance of the year, as well as the distributions center.

So it's probably too soon, but I do believe by the end of this year, and certainly as we forecast commodities for 2010, we should see the full impact. I mean, it takes a little bit of time but, again I think right now the COGS flattening out has more to do with mix and the fact that there was a slight increase in commodity costs but we were able to offset that. I think longer term you should see some additional offsets from the co-op. Right now it's just, it's really probably too soon. And the cost of fuel has probably worked against us.

Okay. Thank you.

We have a follow-up question from Chris O'Cull with Suntrust. Please proceed.

Thanks. Just a couple of follow-ups, one related to the additional -- potential for additional Capex. Julia or Jack, is it safe to say that any additional Capex necessary to maintain the existing stores as company stores would be more than offset by the additional cash you would receive from owning them?

There really is no substantive increases next year in 2010 from a G&A perspective. If anything, it would just be slightly more Capex. But you're talking de minimus compared to the amount of cash that those almost 400 restaurants spin-off. So it really is de minimus.

That helps. One last question in regards to pricing. Does the two for $20 promotion offer you more flexibility to increase menu prices? I mean, I would think that if you needed value and you raised prices, you could still go to the two for $20. But if you were somewhat insensitive to price you would be able to order it, obviously, on the menu. So any thoughts on that.

Oh boy, gosh, do you have an hour? I mean, pricing is an art and it's a science and truth be told, and I'm not trying to be funny about this, but it so depends on where you are, your competitive set, where you are in the marketplace. I mean, there are so many variables. That's why I really do think about tiering from a pricing standpoint, and I truly believe Mike and the team have done a really good job on the company operated side and the franchisees have done a great job, it depends on so many variables and where you are. But in general you can make an argument that a very price oriented promotion like that with two for $20 attracts people who may want that value and certainly effective pricing, which is really probably a better idea. Items that didn't exist before that you can put on the menu at a certain price but in this environment, you have to be super,super, super careful. And it really does depend on where you are, right?

I would suggest your pricing in Ohio might be better than pricing in New York. These franchisees do a fabulous job of knowing their marketplaces better than anybody. It's not a broad answer because it really does depends on --even in our company markets we price differently in Michigan than we price in DC. It's tough, but I think we are being very thoughtful about not taking pricing. Candidly, the franchisees have done virtually no pricing this year. They've been de minimus for that very reason. There's a high sensitivity mark.

Thanks.

With no further questions in the queue, I would now like to turn the call back over to Julia Stewart for closing remarks. Please proceed.

Well, we thank you very much for this call. Great questions. We'll see you next or talk to you on October 27. And, as always, management is always here for questions if any of you have them. So have a great day and thank you so much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day, everyone.