Dine Brands Global Inc (DIN) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to the DineEquity third quarter 2009 investor conference call. I'll be your operator for today. At this time, all participants are in a listen-only mode are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) This conference is being recorded. I would now like to turn the conference over to your host for today. Ms. Stacy Roughan.

Good morning. Thank you for participating on DineEquity's third quarter 2009 conference call. Today in investor management me 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 release, as well as in our most recent 10-Q filing with the Securities and Exchange Commission.

In addition, DineEquity disclaims any internal obligation to update these forward-looking statements. In conjunction with our prepared remarks today we have provided additional information for your viewing on our IR website at DineEquity.com. The document can be found under the calls and presentation section at the IR site. Posted as supporting materials for today's webcast. If you have not already done so we encourage you to download the presentation. Additionally on this call we may refer you 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. I would like to turn the call over to Julia Stewart.

Thanks, Stacy. Good morning everyone. While we'll spend some time reviewing the details of our financial performance I would like to begin by saying I'm quite pleased with our third quarter performance and year-to-date results. Whether you look at the steadily increasing profitability of our core franchising business, our aggressive management of G&A, our ability to deliver Company margin improvements despite same-store sales weakness, or our significant free cash flow generation, these factors clearly demonstrate our disciplined approach to optimizing the performance of our business. And as a result we've improved our guidance outlook on a number of key metrics for the year and continue to maintain our financial flexibility for the future during this difficult economic environment.

So let's start with we're making meaningful progress in energizing the Applebee's brand with numerous marketing, menu and operational improvements achieved since we completed the acquisition nearly two years ago. We're confident that these efforts along with the focus on sustaining IHOPs leadership position will result in market share expansion for both of our brands, as the economy begins to grow again. Admittedly we were disappointed with our same-store sales performance for the third quarter of 2009. IHOPs domestic system wide same store sales decreased 1.1% and Applebee's domestic system wide same store sales decreased 6.5% for the quarter.

The difficult same-store sales environment we experienced in June persisted throughout the summer months. During the quarter, July represented the most severe decline for traffic for both brands with modest improvements in August and September. This weakness was felt across the competitive set in both family and family dining and not unique to DineEquity. Year-to-date IHOP same store sales remain slightly positive increasing to 0.2% compared to the same period last year. IHOP continues to outperform the competitive set in family dining not just for the past few quarters but for the past few years. In fact, IHOP remains one of the best performers in the restaurant industry thanks to our unwavering commitment in improving operations and driving new franchise restaurant growth. Year in and year out. And while comp weaknesses continue into the current quarter, IHOP remains focused on these key strategies and expects to meet its full year domestic system wide same-store sales expectations of positive 1% to negative 1%.

We're also optimistic about the positive impact that our new limited time offer, Holiday Hotcakes should have in our fourth quarter same-store sales performance. We also are excited about our new third party distribution partnership in place for IHOP gift cards to be sold at more than 20,000 retail locations such as supermarkets, big-box discounters and broad-line retail stores. We think this will have a positive effect on consumer awareness, keeping IHOP top of mind. We expect to end the year on a strong note with franchisees on track to meet our expectations of opening between 65 and 75 new IHOP restaurants this year. I don't know of any other sit-down restaurant brand that is opening new restaurants at the pace that IHOP is, which is a credit to the brand and the belief that franchisees have in the future of our business. Finally, by year-end franchisees will have successfully remodeled every IHOP in our system, a process that began back in 2004. It is quite an accomplishment.

Turning now to Applebee's. Applebee's domestic system-wide same-store sales decreased 4.5% year-to-date compared to the same period last year. And while we're in the mid-stages of a multi-year turn around of the Applebee's brand this revitalization process has certainly been more difficult by the severe economic contraction. Given those broader economic conditions, we're quite pleased that Applebee's domestic system-wide sales performance has held pace with the competitive set particularly in light of the continued agressive discounting on the part of many of our competitors. However, we believe Applebee's can perform at a much higher level as our revitalization efforts continue to take hold and as the economy improves.

Looking ahead we expect domestic systemwide same-store sales to perform at the lower end of our previous expectations of between a negative 2% and negative 5%. We are optimistic that the system should perform within this range due to several factors at play in the fourth quarter 2009. We are encouraged by an improvement in Applebee's same-store sales trend so far in the month of October. And while we rarely ever comment on intraquarter and recognize that one month doesn't make a trend, it's a factor that leads us to be cautiously optimistic about an improved same-store sales performance for the fourth quarter.

We also expect to continue to Applebee's 2 for 20 value offerings for the balance of 2009. Over the past year, we built meaningful brand equity in our 2 for 20 offering and despite competitive pressures, it continues to be an effective and profitable value promotion for our system. We will take 2 for 20 to the next level with enhanced advertising efforts supported by a tie-in with ESPN, as well as new menu introductions that will be featured in our promotional advertising throughout the quarter.

Now, historically Applebee's has led other casual diners in sports advertising spend. Now we are targeting our dollars more effectively around high-value properties like football and ESPN, to reach our target consumers and create a distinct leadership position for Applebee's. We have comprehensive marketing program in place which includes commercials featuring ESPN sports caster Chris Berman. You will also see Applebee's game-time lineup sponsorship of ESPN's Monday Night Football and Thursday college games, as well as an extensive digital media strategy with ESPN.

Additionally, we are extending our efforts in restaurant as we look to create events to drive guests into Applebee's during game time. And as for our menu, we continue our work to comprehensively refresh the Applebee's menu with craveable and differentiated items that are true to Applebee's grill and bar heritage. We have two menu updates planned for the fourth quarter alone; one of which launched last week and a second update expected later in the quarter. Last week's menu launch included the introduction, my new favorite, Caso Blanco which is a shareable, high value appetizer with great flavor. The launch also has a new lineup of premium sandwiches including open-faced knife and fork sandwiches in steak and chicken, cordon bleu varieties and a terrific new all American Ruben sandwiches. These are the first of many classic American sandwiches to come that combine fantastic bread, quality meats and signature sauces, to create distinctive items available only at Applebee's.

We also are particularly excited about Applebee's upcoming national event to honor veterans, and active duty service men and women. After a successful test in a limited number of markets last year, Applebee's is inviting America's veterans and active duty military coast to coast to enjoy a free entree on veterans' day, November 11th. Applebee's has a long history of supporting our neighborhoods. This is one reason that Applebee's is America's favorite neighborhood restaurant. Connecting with our guests and supporting causes that they cherish, is an integral part of Applebee's DNA and that of our franchisees.

Based on feedback from last year's tests, we're optimistic about the positive impact this national event will generate in the communities we serve. It is our way of saying thank you to Americas real heros, the men and women of the military who keep keep our neighborhood's safe. It is very similar to the different IHOP makes on National Pancake Day, giving back to our guests and coming together for a worthy cause.

Jack will touch upon our strong Company restaurant operating margin performance at Applebee's in a moment. However, I want to acknowledge that the team continues to deliver sustainable margin improvement despite same-store sales weakness. It also is important to note that we are not improving our margin at the expense of the guest experience in our restaurants. In fact, we continue to post all-time high guest satisfaction scores, a solid indication that we're taking care of our guests, as we improve our margins.

Finally, turning to our franchising efforts we remain committed to the strategic objective of transitioning Applebee's into a more highly franchised restaurant system over time. And while we continue to market our Company operated Applebee's restaurants we recognize that it has been a year since we last announced a transaction. Therefore, we thought it would be helpful to provide a little more insight into the process and give you a broader perspective on the factors that are influencing our ability to turn negotiations into filing transaction agreements.

So throughout the past year we have been in negotiations with one or more prospective franchise buyers for every available market. This process has included single and multi-market transactions. In fact, we've had serious discussions several times with qualified buyers who were interested in buying more than 200 Company-operated Applebee's. As we progressed through these opportunities, we have been very selective. First making sure that the prospective buyers are financially qualified, that they share our vision for revitalizing the Applebee's brand; that they are willing to reinvest in the business; and that they are bringing management teams to the table that possess the ability to run Applebee's's restaurants on par with the significant operating capabilities of our existing franchisees.

So, here is where we are today. We have qualified prospects for single market as well as large multi-market transactions. Our valuations, despite recent same-store sales weakness remain intact due to our solid performance on the bottom line. We are in a strong position and will continue negotiations until we can achieve binding transactions. However, the timing of transactions could be highly variable due to the numerous factors influencing the process, including those which I just discussed, as well as availability of financing and acceptable deal valuations.

The good news is that as we stated last quarter, we have no need to sell our highly valuable restaurant assets in the near-term for less than full value, or with undesirable terms, or to buyers who do not meet our expectations. We possess the financial flexibility -- excuse me -- to meet our debt obligations and will only pursue transactions that make sense for our shareholders. For perspective and to reinforce this fact, our EBITDA performance year-to-date, excluding gains on debt retirement, is essentially flat compared to the same period last year, when we were operating approximately 80 more Company restaurants. Simply put, we are optimizing the performance of the business and maintaining our financial flexibility for the future even during a severe contraction in the economy.

Now, for more detailed discussion of our financial performance for the third quarter, 2009, I would like to turn the call over to our CFO, Jack Tierney.

Thanks, Julia. I would like to focus on a few key points in the quarter, expand on the key drivers of our improved financial performance, and then discuss year-to-date performance. We reduced year-over-year G&A expenses by $5.9 million in the third quarter. We improved Applebee's restaurant operating margins by 220 basis points. This is the third consecutive quarter that margins have increased on a year on year basis as the result of operating improvements. We reduced interest expense by $5.3 million, and net of closings we opened 12 new IHOP restaurants and 10 new Applebee's restaurants. The results, earnings per share adjusted for non-cash gains and charges of $0.55, versus a loss of $0.08 in the third quarter last year. This remarkable improvement is more evidence that we are on track to deliver our plan for improved profitability and position DineEquity for accelerated growth when economic conditions improve.

I will now expand on the key drivers behind our third quarter performance. First, G&A expenses are down $5.9 million, primarily as the result of refranchising 110 Company-operated restaurants last year. Integration synergies between Applebee's and IHOP and overall aggressive expense management. These improvements are ahead of our previous guidance and we have now reduced our full-year G&A expense to range from 160 million to $165 million.

Turning to Applebee's, by focusing on our restaurant margin initiatives, we increased operating margin by 220 basis points to 13.6%, compared to 11.4% in the third quarter last year. As I mentioned earlier, this is the third consecutive quarter that we have increased Company restaurant margins as the result of operating improvements. This increase was largely achieved from effective pricing of 2.4%, better labor rate management, and higher discounts on food and beverage, partially offset by the deleveraging effect of lower sales and unfavorable mix.

For the first 9 months restaurant operating margins improved 270 basis points to 14.7%, compared to 12% last year. As a percent of sales, food and beverage costs improved 70 basis points behind higher discounts and rebates, labor costs improved 160 basis points on non-recurring retention costs made in 2008, better productivity and improvements in wage rate manage. We are confident that our margin improvement is sustainable and have reiterated full year guidance of 13.5 to 14.5% or an improvement of 180 to 280 basis points compared to 2008. And as Julia noted, our margin improvement has not come at the expense of guest satisfaction levels which are at record highs. Interest expense is $5.3 million better than last year, primarily as the result of debt repayments in the first half of the year and lower interest rates on our variable line of credit. Our effective tax rates for the third quarter was 21.5%, and we now expect the full-year rate to be approximately 31%. Throughout 2009 we have benefited from settlements with individual state taxing authorities. Without these benefits, our rate, assuming the operation of 400 Company restaurants, is an estimated 34%.

Our positive year-to-date results were influenced by essentially the same factors that drove our third-quarter performance. On a year-to-date base circumstances G&A expenses are favorable $21.6 million. Applebee's operating margins are up 270 basis points. Interest expense is down $13.1 million, and there are 58 more restaurants in the IHOP system and five more in the Applebee's system versus the same period last year.

Moving to cash flow, there are a few items I would like to draw your attention to. First, cash from operating activities totalled $102.9 million in the first nine months of the year. The increase of $41.7 million is primarily the result of higher net income and lower working capital requirements related to the timing of payments for advertising and taxes, and lower receivables from gift cards. We have increased our guidance on full-year cash flow from operations by $15 million, or in the range of 130 million to $140 million. Second, free cash flow was $90.6 million, in the first nine months of the year, compared to $22.4 million last year. To be consistent with 2009, we adjusted free cash flow for 2008 to include common dividends. In addition to the $41.6 million improvement in cash flow from operations, capital expenditures are down $17.4 million. As a result, through September we have reduced funded debt by $142.3 million and we have $105.1 million of unrestricted cash on hand. As noted in our press release, we did not buy back debt in the third quarter. But make no mistake, we remain commit to do reducing debt and will continue to opportunistically buy back our bonds.

Now, turning to our debt covenants, we remain in compliance with our key covenants, our consolidated leverage ratio or adjusted debt to EBITDAR, at the end of Q2, is 5.97, 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 3.47, for IHOP, and 2.98 for Applebee's, compared to a minimum threshold of 1.85. So overall, considering current economic conditions, we are pleased with the third quarter and year-to-date results and believe we will finish the year on a strong note. Now, I would like to turn the call back to Julia for some summary comments.

Thanks, Jack. For the balance of 2009 we remain committed to executing our strategic agenda for the Applebee's and IHOP brands and continuing to successfully manage our business in the face of challenging consumer and competitive conditions. In all, I believe we're doing all the right things for IHOP and Applebee's businesses, given the environment we are operating in, and our dedication to proven strategies that will build and protect our brands for the long-term.

We are navigating a highly competitive marketplace with a commitment to offering value in a way that strengthens our relationship with consumers, and does not weaken our brand position. Menu innovation is critical, as we stay relevant and top of mind with consumers. Our marketing is more strategic and expansive leveraging relationships, utilizing digital media to enhance traditional advertising, creating efficiencies of scale and increasing our reach to targeted consumers. Our goal is to exceed guest expectations with flawless execution at the restaurant level, and our AB operator rating systems as well as guest satisfaction improvements, enhance our ability to reach this goal. In these and other ways, Applebee's's and IHOP share a strategic framework for success as we remain focussed on those things within our control and position our brands for market leadership and share expansion as the economy recovers. With that, we would be happy to answer any questions. Operator?

(Operator Instructions) Our first question comes from the line of Destin Tompkins with Morgan Keegan. Please proceed.

Thanks, Julia, I'm just curious some of your thoughts on the 2 for 20 menu. It sounds like you're comfortable with it. You're going to continue with the promotion, I guess, or that program for the rest of the year, given that some of your competitors are doing similar offers including maybe a dessert, have you thought about tweaking the program at all and, are the new menu items that are rolling out going to be part of the 2 for 20 menu?

That is a great question. So three things, one, as I mentioned in my prepared comments there is no question that we make money with the 2 for 20, both at the Company restaurants and our franchisees so the way we have structured 2 for 20 it protects our profit margin, so, the answer is yes, we like what we see, but we also recognize, number two, we need to be creative and innovative with updating it, so what you'll see is some new items added and some old items taken off site? Because not everything is 2for 20. It is a select menu. So think of us as updating it and keeping it fresh and alive. And, thirdly, as I said in my prepared comments, we've done, although not quantitative, we've done some qualitative research to indicate that because we were there first and larger and louder, we have quite the brand equity with 2 for 20. So I think we'll stay where we are, and, let other people try to steal shamelessly.

Okay. On G&A, Jack, you guys have been successful in controlling G&A pretty well. How sustainable is that? Is there the chance that G&A might go up next year? If there are -- I don't know if incentive compensation is a part of that, if that's part of why we're seeing a little bit lower G&A level this year, can you kind of walk through some of the dynamics of how G&A will change?

One of the things we are going to do is give guidance when we -- when we give fourth quarter results, so I don't want to go into a lot of detail. But we do have good synergies between Applebee's and IHOP that are obviously sustainable. When we refranchise restaurants and we reduce G&A again that is sustainable. And it is noted in the press release and in my script, we did have, I think, aggressive management of G&A expenses this year, and essentially because of the year started off so dire, if you will, that really we didn't know how the year would progress, and as well the rest of the industry. And so we probably did cut back on some G&A that we -- will probably want to restore in 2010, but at this point I don't really want to go into numbers, and it would not be the vast majority of the G&A savings that we have experienced in 2009.

Okay. Thank you. And then lastly on the debt repayment, it seemed like you generated a significant amount of free cash flow in the quarter yet didn't buy back much debt. Is the fourth quarter -- is the plan that, gives you some flexibility in the fourth quarter, or how near-term do you look at some of the debt repayment options?

Yes, essentially, we never really intended to buy it back every quarter. We're buying debt back when we have the cash and the bonds are available. I mean, there is a lot of times when the bonds available and we're not in a position to buy back debt. The conditions have to be right for us and then we'll buy it back.

But think of us as being highly opportunistic.

Great. Thank you.

Our next question comes from the line of Steven Rees with JPMorgan, please proceed.

Hi, thank you. Julia, I just want to ask about the overall competitive environment out there. I guess there is some concern that discounting and promotions have been intensifying from both the local independents and the larger national players. I guess one, do you think that is the case, or are you seeing any signs of stabilization on the promotion front? I think you talked about accounts picking up a little bit quarter to date. Can you you just comment on what you're seeing out there from a promotions and discounting perspective.

I don't know if I mentioned this before but I don't think all sales are created equal. I think we've been very clear from the very beginning that we're going to protect our brands. I think that is part of what we do as a franchisor. And I think this notion of getting into heavy discount, certainly from my (inaudible) and certainly those of the management team is a slippery slope and you do over time lose brand value. Our job is to protect the brand and I think the approach that you've seen us take is one of value, but protecting the brand.

There are certainly some competitors -- and when I say that, Steve, I speak both nationally and regionally -- that are in a very different position than us. Perhaps don't have the brand equity that we do of the and maybe forced into a heavy discounting. But I don't think you've seen that with us. That's not our strategy. Our franchisees are very supportive of what we're doing and ours is to continue in that mind set. Again, remember, we make money where we are, and the 2 for 20 is not 80% of the mix, it is like 20. So there is 80% of the people coming in ordering something other than 2 for 20. So I think our strategy is working and we continue to employ it. But there is no question that you have some direct and indirect competitors either giving it away, or are discounting it aggressively, and that's just not our strategy and that's not who and what we are. Plus, we are also in a position to protect the brand and its -- and its equity, and that's what we've been seeing that we're capable of doing.

Okay. Thank you for that. Just on sort of the comp agreement you talked about quarter to date, is that just sort of consistent with the comparisons that were 1 or 2 points easier last year, or is there something that you can attribute that to?

I would say for the first four weeks, and I clearly said four weeks doesn't make a trend , although my marketing team would say maybe yes. But I would tell you that we've seen signs of improvement the last four weeks. We believe all of the things are in play to make that sustainable for the rest of the year, but I believe it is a combination of the things that we're doing at Applebee's and I -- I give a lot of credit to the operators, the franchise, and the Company operators, who are executing flawlessly. Don't ever discount the fact that when you have operating scores the highest in US history, that contributes to that momentum. So all in all, feel really good about what we're doing. And you heard some of the things we're doing for the balance of the year, that I think create interest and momentum

Okay. And then just finally to follow up on I guess Destin's question on the G&A, that is one of the parts of the model I'm struggling with. You gave a pretty tight range that was dependent on some refranchising this year but that didn't happen but yet you're still coming in below the low end of that range. I know you don't want to comment on specific numbers but how should we be thinking about G&A over the next couple of years as refranchising is completed and how much lower can it go and I guess is it probable that it is down again in 2010 versus 2009?

Yes, I think two things. At the beginning of the year we said our forecast was 165 million to $175 million. If we sold a couple hundred units we would be at the 165, if we didn't, we would be at the 175. So that was the position at the beginning of the year, and you can take off the top, the $6 million that we don't have recurring in 2010, because we don't have the co-op any more, the purchasing department, so you can take off the top. But I thought Jack's comment was fair. There are other things that we have to take into consideration as we build this G&A plan for 2010. And so I would suggest to you, be careful about trying to automatically take it down again. We were extremely aggressive this year with G&A. There was no merit increases, we told you that we didn't replace people that were laid off, or that resigned, so we've had an aggressive year in G&A. I would be very careful about using that as your platform and then building upon it. Rather, I think you're better off listening to our guidance which is what, the end of February, early March? Yes, I think that will give you a much better handle, because we've been very aggressive this year. I'm not sure all that is sustainable in 2010 canceling.

Great. Thanks for the color. Got it. Thanks.

Our next question comes from the line of Chris O'Cull with SunTrust. Please proceed.

Hi, Chris.

Hello. I'll direct my questions towards IHOP. At least one of them . Julia, do you think IHOP's menu mix was negatively impacted by the promotion that you ran during the quarter? How did the -- when you look at the same-store sales, how did it -- how did traffic versus

Well, that's probably a fair comment. I think we've learned a lot from that promotion, and candidly I think we were so excited about IHOP's relationship with NFL, we probably did a -- probably too good of a job on the insert in the POP and the average person came in and loved what they saw, and there's no question that we --our mix doubled from what it normally is with, limited time offers, and that has some impact. But it really I think in general history certainly the years I have been here, that is probably one of the highest missions we've ever had. It was upwards of 14%. Which says two things , right, it says people want value. And it was inherently sort of a value menu without us ever thinking we were putting a value menu on the menu. So that part was sort of inherently kind of

Okay. And I know you ran the kids eat free promotion I think during the quarter as well. What was the response to that promotion?

That was good. We got a lot of interest and certainly brought in consumers that maybe hadn't come as frequently. And, again, all those things combined drove sales but we just didn't see it, enough to -- and it was just, you know, a de minimus increase because we're fighting that comp thing. But in terms of the day part usage and some of the other measurements, we did see some increases.

Okay. Great. Two other question s Jack, are there any mandatory principal payments for '09 or 2010?

There was the -- not on the -- not on the large piece of debt, on the subordinated debt there is. Greg, $25 million a year?

About $20 million a year, approximately.

$20 million a year?

Right.

Okay. And those are paid--?

I think in 2010 it goes to 25.

Okay. And those are paid in November?

No, they're paid monthly.

Oh, monthly. Okay. Okay. And then Jack, do you have the debt service coverage ratio for Applebee's securitization on the 12-month adjusted basis? I know you guys provide that in the Q. I just didn't know if you had it.

On a 12-month basis Applebee's was 2.89 times.

Great.

Remember, that 12 months doesn't go into effect until January.

Right. Okay. Great. Thanks, guys.

Yes.

Our next question comes from the line of Bryan Elliott. Please proceed.

Hi.

Hi, Bryan.

Good morning.

Good morning.

I'd like to sort of big-picture Applebee's sales a little bit. The first half of the year clearly outperformed industry benchmarks, this quarter, slightly outperformed industry benchmarks. You talked about October being a little better, but last year we were as an industry kind of in free-fall. Do you have the sense that you're widening the gap again here again in the last month against industry trends?

Boy, great leading question. I don't know, Bryan. I'm cautiously optimistic. We're certainly doing all of the right things. I don't want to underestimate the power of a 2,000 domestic unit chain being able to improve its menu twice in a quarter and doing all of the other things we're doing. We couldn't do more. I couldn't push them any harder than we're currently doing. We're doing all of the right things, and that's a complement to the fact that we have the pipeline. We have all of the right strategies in place. So the kudos go to the management team. But in this environment it is a little bit risky to make projections, but I would say we're doing all of the right things and we're again off to a really good start in fourth quarter, but, you know, candidly I only know us and how we're doing and October was markedly better for us but I don't know enough about the rest of the industry to know whether we're an anomaly, or everyone else is picking up that same positive. And a few people have commented on October -- as you know, I don't ever really do that -- but I thought the color was useful. But I don't know. I don't know. I think we'll know more at the end of this year about, are we -- are we separating, different concepts from each other? Are you seeing those differences more pronounced?

All right. It wasn't meant to be a leading question; it was just meant to be a--?

I took it as such.

I guess another way to ask the question, just, in terms of there was the data that you all can see, I mean, what the delta was October last year to September last year, and if you kind of looked at the two-year run rate, does that show improvement, or more static from that perspective?

Slight improvement.

Okay. That's really what I was trying to lead you to, was some sense of that. Thank you.

I haven't had my coffee this morning, sorry.

Just real quick. Sort of commodity update and outlook, as -- for the Company Applebee's business, benefits from the co-op that is accruing to the Company's income statement, maybe outlook for 2010 as you begin to hone in on that a bit. Just some thoughts there would be helpful. Thanks.

On the commodities, I think I mentioned this last quarter, Bryan, but I may not have, we were going into quarter year-to-date for the Company ops. We were negative 1.2. So we were slightly negative year-to-date on -- on commodity expenses. But we had kept saying throughout the year we were doing things to make up that difference. We were obviously positive on our profitability.

Excuse me, when you say minus 1.2, you mean you were looking at the market basket up 1.2% year on year costs, inflation of 1.2, in other words?

Correct. That's right. Inflation of 1.2% year-to-date through quarter three and we see a reversal of that in quarter four. So there are some highly flexible items where you're going to see some big movement, produce in particular. But we'll see a positive to the market basket in the fourth quarter. So the full year will be, I guess my point is for the full year 2009, the Company operations are saying that there will be a slight negative, .89, or if you want to round it, 1%. But to the commodity basket, a slight unfavorability. Which is really amazing because we talked about it at the beginning of the year we thought we were going to be about 3%.

So we're actually improved against our forecast, and then I'll have a really robust number for you in the call that we have with our guidance, and not only will I have a number but I'll be able to report out in a lot more detail, because if you think about it by then the co-op would have been in existence for a year, and we would be in a much better position to take their forecast and talk to you a little bit more, line item by line item. But the net-net is for the full year, Company operations for 2009 of 0.89 or a slight negative for the full year in commodity. And then I think we'll be in a much better position next year to have a much more robust discussion about this, because as I said the co-op would have been in existence for a year.

Very good. Thank you.

You're very welcome .

Our next question comes from the line of Greg Ruedy with Stephens.

Good morning.

Good morning.

I'll follow on Bryan's question there. 2.4% of price in place at Applebee's, is that taken in conjunction with the new menu items, and will -- is that price level above or below maybe what you're expecting for that commodity basket next year?

So 2.4% is for the quarter. We really haven't guided anything for 2010. I'm not sure I understood your question. Is that -- does that answer your question?

Well, I was -- I'm just wondering if you're expecting commodity inflation next year to be above or below that rate -- rate of pricing you will have on--?

It will be below. We're not looking at commodities to be higher than 2%.

Yes, again, I'll have a detailed forecast for you, but I can't imagine, not based on the preliminary work. But we'll have a lot more detail for you. The other question I think you're asking is, where are we with a pricing strategy for 2010. We're in the process of creating that as we speak whether there is a price increase. The thing you have to be sensitive to with a Company-operated menu, I can't speak to the franchisees, but on the Company side, I call it effective pricing. When you put a new menu on the item, you are effectively taking effective pricing. So a lot of that will depend on where our categories are next year for where we price or if we do at all. New menu items under $10, which would be the large majority, maybe some of the appetizer category. So we'll have a much better handle on that when we give guidance.

Okay. Great. I appreciate that color. Jack, I think you mentioned that there was some deceleration in the gift card receivables category. How does that compare to the rate of change in comps?

It does, and it's really just seasonal. Most of our gift cards, we will actually start building them up now in the fourth quarter. Most of the sales occur in the fourth quarter and then they're slowly used over the year.

Although the bulk of those gift cards are redeemed within the first quarter.

Right.

Very good. Thank you.

Yes.

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

Two questions, one was on refranchising and the second was on your value initiatives as far as the menu goes. On refranchising and the second was on your value initiatives as far as the menu goes. On refranchising I think your last comments were that the banks were making it sound like they were doing more deals than they actually were. So I was wondering what you were seeing there? And then on the valuation.

Well, the first comment is right on, brother. You're absolutely right. If banks are telling you they're lending a bunch of money, I want their names and their numbers. No, it is still a tight market. Although I think it is loosening up a little bit. Nobody is saying 10% down and you can buy restaurants. It's still a tremendous amount of equity that they want, and private equity is still there, interested in helping to make deals happen. But it's still a tight market. It's loosening up ever so slightly but I would not say it's demonstratively changed.

Great. And then on offering consumers' value, how should we think about next year as far as continuation of 2 for 20? And before I think you talked about the possibility of trying to engineer products with attractive price points and gross margins. Can you tell us where you stand on those efforts?

Yes, I'm going to be very careful. I'm not trying to be coy, but given the fact that we're in such a competitive situation, I'm hesitant to give away confidential information about our strategic marketing plans for 2010, so I'm not trying to avoid your question, but I really want to be careful here, because that is a serious competitive question. So think of us as doing everything we can in 2010 to differentiate the brand and certainly have value, but do things that really do enhance people's perception of the brand. So think of us as doing anything and everything. I probably won't give it all away even in the guidance call because I'm thoughtful about that. But think of us as being aggressive in terms of differentiate the brand but also positioning ourselves for value. Which is really when you think about it, that has been the brand's positioning for forever. Since when I worked here before. We've always been on the low end of the check average in the category. We position ourselves not as low-cost provider, but as a very valued play and I don't think that will go away forever, but how we execute that in 2010, is something that we are in the midst of working on. I'm not trying to avoid, but I hate to get into confidential information. Is there anything else, though, that I might be able to give you color on?

No, that's good enough for now. Thank you.

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

Good morning.

Good morning.

My question is just as -- if I asked a different way on the pricing side of things, do you plan to take a price increase with the two menu updates on the Applebee's side? And when does the 2.5% pricing that you had in the menu, when do you start to cycle that off?

So we said at the beginning of the year that that cycle would come off in December of this year. So that price effectiveness, that we took at the end of last year will come off as of December this year. In terms of the pricing that is effectively in play, because of the new items, it's hard for me to judge that until I see mix. So I'll be in a much better position to tell you whether there was any effective pricing when I see what happens to the mix in fourth quarter. So think about it. Quarter one, it was a 3%. Quarter two it was a 3%. Quarter three was a 2.4%. And so for the year we're running a little over 2.8. So effectively that goes off at the end of this year. But it's hard for me to judge with these price increases, because it may or may not fit within the mix. So I'm in a much better position to tell you how do we end up for the year, when I finish the year, and then we'll guide for what that effective pricing, if any, would be in 2010 again, for the Company stores. Does that make sense?

Yes, that makes sense. And then just a question on are you seeing any regional differences among the Applebee's or IHOP sales trends? Obviously there for a while it's been California and Florida, although I guess Texas has been a weaker market certainly year-over-year of late. I'm wondering what you're seeing in terms of any areas or regions where you're seeing improvement or degradation.

I think it was just what you said. We've seen the Coasts be hurt and then most recently the Southwest. But the better way to think about it again is unemployment. If you look at unemployment and then you look at our sales, and those top markets, there is a lot of synergies. So real weaknesses in California, and what I'll call the mountains, you know? The Denver, Montana, places that have less population, they have been really hit with -- with unemployment, and then big strength in actually the mid-Atlantic, which has been sort of ongoing and Florida. That is more for Applebee's in Texas. With IHOP, we see more weakness in some of the bigger markets, like Los Angeles, Atlanta, Chicago, and I think our biggest strength at IHOP -- it depends on sort of where you got high concentration. But I think it has a lot to do with unemployment. If you look at the unemployment, there is sort of usually a direct corollary.

Very helpful comment. Thank you.

Thank you.

Our next question comes from the line of Michael Wolleben with Sidoti.

Good morning.

Good morning.

I just wanted to go back and touch on the G&A savings here one more time here for the fourth quarter. If you look at it year-over-year, the savings that you guys have put up over the past two quarters is pretty impressive. But guidance only implies here about a $600,000 savings to get to the low end of the guidance there. Is there something in the fourth quarter that would preclude you guys from showing another impressive savings on that line?

Yes, essentially the -- there are expenses that we incur in the fourth quarter that are higher than what we've incurred in previous quarters for primarily for IHOP. Where we're paying for some things in the fourth quarter that will bump that up.

All right. And then just -- on that 2 for 20, as well, we heard from a competitor that their version of the deal drove traffic but impacted the margins negatively. Can you kind of comment on what you guys are seeing? Is your 2 for 20 driving enough traffic to offset any margin pressure from that 20% of people who are ordering that deal?

Yes.

Yes. Okay. Great. Thank you you.

Okay. I would like to turn the call over to Ms. Julia Stewart now.

Well, thanks again for the call. Thanks again for the questions. As always, if you have any additional questions, you know that Jack and Stacy and myself are certainly available for you, and we will get back with you, Stacy, March 3.

Yes, I believe so.

March 3, will be our next investor call and guidance call. It will be year-end and because we have a 53rd week in there, we're just a couple of days behind normal and then obviously we'll go guidance at the same time or -- yes, that would make sense. Thanks again. Thank you, operator.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.