Dine Brands Global Inc (DIN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 DineEquity earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of this conference. (Operator Instructions)

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

Good morning, and thank you for participating on DineEquity's first quarter 2010 investor conference call. Today with us from management are Julia Stewart, Chairman and CEO, Jack Tierney, CFO, and Greg Kalvin, Senior Vice President, 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 from those expressed or implied in such statements.

We caution you to evaluate such forward-looking information and the context of these factors, which are detailed in today's news release as well as in our most recent 10-K and 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 IR website at www.DineEquity.com. The document can be found under the calls and presentations section of the IR site posted on 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 release today, which is also available on DineEquity's investor relations website. Now I will turn the call over to Julia Stewart.

Thanks, Stacy, and good morning, everyone.

We're pleased with our solid first quarter 2010 performance and we're encouraged by sequential improvements in same restaurant sales at both Applebee's and IHOP restaurants. Applebee's restaurant operating margin performance was solid, and we benefited from lower levels of G&A expense during the quarter. Additionally, we retired $55 million of securitized debt in the first three months of the year. So looking at same restaurant sales, Applebee's domestic system-wide comparable sales decreased 2.7% for the quarter. This continued our sequential improvement trend, up from negative 6.5% in the third quarter 2009 and a negative 4.5% in the fourth quarter 2009.

Our results included an unfavorable comparison to the Easter holiday last year, which negatively impacted our results by approximately 60 basis points. We also estimate that weather negatively impacted the first quarter by approximately 70 basis points. Taking these factors into account, Applebee's same restaurant sales would have performed closer to negative 1.4% for the first three months of 2010.

We believe we are creating solid momentum in the Applebee's system. We began 2010 with a launch of unbelievably Great Tasting and Under 550 Calories, which differentiated Applebee's with a unique and compelling menu offerings for our guests. Guests have a choice of five lower calorie full portion and great tasting menu options like Asiago Peppercorn Steak and Spicy Shrimp Diablo. We supported under 550 nationally with our new advertising creative There's No Place Like the Neighborhood along with a national freestanding coupon insert in January to drive guest trial. This led to positive traffic results in the month of January and was a great start to our efforts to build brand equity around under 550. This is a clear signal to us that differentiated relevant menu innovation is the foundation from which we expect to drive improved same restaurant sales performance over time.

Marketing and menu efforts for Applebee's continued in March with the national promotion of Ultimate Trios. With more than 200 combinations including several new item choices like Wonton Tacos and Spicy Queso Blanco represents the type of every day value that Applebee's is known for. Trios was supported by national advertising and included air time during the March madness tournament as we continue to improve our spend around sporting events. Applebee's gift card redemptions were also a positive performance factor as our bonus gift card program helped boost sales during the quarter. Applebee's differentiated marketing and menu efforts continued in the second quarter 2010 with the launch of real burgers across America which we began to advertise nationally last Monday. Applebee's new real burgers have flavors that are as unique as the neighborhoods that they were aspired from, with which regional taste such as Philly, Southwest Jalapeno and new and improved Cowboy Burgers.

Turning to IHOP, IHOP's system -- domestic systemwide same restaurant sales decreased 0.4%. This was a meaningful improvement compared to a negative 3.1% in the fourth quarter 2009, as IHOP refocused on value oriented offerings and events. Additionally, the Easter holiday shift was a positive factor during the first quarter 2010. Improving our comp performance by approximately 30 basis points. We estimate that weather negatively impacted IHOP approximately 70 basis points. IHOP's same restaurant sales would have performed closer to flat taking into account these factors.

IHOP kicked off the year with our strong performing all you can eat pancakes promotion emphasizing value with the nationally advertised price point starting at $4.99. Our limited time offer strategy continued in March with the return of loaded country potatoes, which is a great bridge product that has appeal across all the day parts. National Pancake Day was also a success factor during the quarter as comps were up 6% for the day, lapping nearly a 75% increase in sales we experienced on National Pancake Day last year. More importantly, we raised more than $2.1 million for Children's Miracle Network and other charities. It was a terrific event for IHOP.

Now IHOP continues to focus on value and differentiation, introducing our new LTO Pancake Stackers last Monday. Stackers leverages IHOP's core brand equities featuring cheesecake layered between two buttermilk pancakes, topped with strawberries, blueberry or cinnamon apple compote and whipped topping. We also introduced IHOP's popular kids eat free promotion for the month of April. Available only during dinner hours, it's a great example of how we're expanding awareness around the dinner day part and emphasizing value with our guests. Additionally, IHOP is currently offering a $5 coupon with the purchase of a $25 IHOP gift card.

So turning to Applebee's company operations, the team is doing a great job of sustaining profitability improvements at company restaurants, while driving increased guest trial and delivering exceptional service and guest satisfaction. Jack's going to provide you a little more detail here in a moment. In regard to the sale of Applebee's company restaurants, we remain committed to the strategic objective of transitioning Applebee's into a more highly franchised restaurant system over time. However, we expect the sale of restaurants to be limited until economic conditions improve. In the meantime, we will continue to optimize the performance of the restaurants, and enhance cash available to retire funded debt. In this way, we plan to capture the full financial benefit of Applebee's company restaurants so long as we operate them.

Now I'm going to turn the call over to our CFO, Jack Tierney, for a more detailed review of our financial performance for the first quarter 2010.

Thank you, Julia. I want to start today's review by summarizing our adjusted net income. Our adjusted net income available to common stockholders for the first quarter was $18.7 million, compared to $19.7 million last year. As stated in our press release, the decrease of $1 million was due to a number of factors. First, the dividend on our perpetual preferred stock is $1 million higher this quarter than in last year's first quarter. Our tax rate was also higher in the first quarter of this year compared to last year. Without these two items our year-over-year adjusted net income available to common stockholders for the first quarter would have been slightly positive despite the decline in same restaurant sales. This improvement is primarily due to lower G&A expenses and lower interest expense.

Moving to the P&L, total revenues for the first quarter were down 4.7% to $358 million compared to $375.6 million in the first quarter of 2009. This decrease is primarily due to the decline in same restaurant sales, last year's refranchising of seven Applebee's company-operated restaurants in New Mexico, an unfavorable shift in sales weeks and temporary liquor license revenue in 2009 from a refranchising transaction. These decreases were partially offset by higher revenues resulting from an additional 59 effective IHOP restaurants or a 4.2% increase compared to the first quarter of last year.

As Julia mentioned, the Applebee's team has done a terrific job of managing costs while also pursuing strategic traffic driving initiatives during the quarter. Let's walk through some of the performance factors impacting our company operated restaurants. Applebee's restaurant operating margins at 14.8% performed just over the high end of our full year guidance range of 13.5% to 14.5%. Compared to the first quarter last year, the margin was unfavorably impacted by increased promotional activity and the deleveraging due to the decline in sales and traffic.

Partially offsetting these unfavorable factors was higher effective pricing and better labor productivity due to our new scheduling system and from lower management staffing. Labor costs as a percent of sales improved 40 basis points in the first quarter. The labor improvement is particularly gratifying because it is permanent. Our ability to improve labor costs will have a significant and positive impact on our profit as the economy recovers and sales momentum returns. As a percent of sales, food and beverage expenses for the first quarter were equal to last year. However, in dollars, food and beverage expenses were favorable compared to last year, and this allowed us to offer higher value menu items as Julia mentioned earlier.

Direct and occupancy costs as a percent of sales were unfavorable 180 basis points in the first quarter of this year, primarily due to the deleveraging factor of spreading fixed costs over lower revenues. G&A expenses in the first quarter of 2010 were down $7 million to $40.2 million. Recall that in 2009, we incurred one time expenses of $6.3 million to establish the purchasing cooperative. Partially offsetting this benefit was higher stock-based compensation expense of $1.8 million. Full year 2010 stock-based compensation expenses are expected to be approximately $13 million.

Our income tax rate for the first quarter was 33.9%, 280 basis points higher than the 31.1% in the first quarter of last year. The lower tax rate last year was the result of favorable settlements with state taxing authorities. We expect the full year tax rate for 2010 to be approximately 34%, in line with our earlier guidance.

There are a couple of other items that I would like to draw your attention to. First our cash flow from operations remains strong. For the first quarter 2010, cash flow from operations totaled $30.3 million. While this is down $27.4 million compared to last year, you may recall that last year's cash flow from operations was unusually high as a result of payments for advertising and taxes being delayed until the second quarter.

Second, we reduced securitized debt by another $55 million, and we reduced interest expense by $3.5 million or 7.3%. As noted in the press release, we have reduced our total outstanding debt by $375.5 million or 15.2% since we acquired Applebee's. The consistent ability to pay down debt reflects our stable cash flow from operations, steady and reliable receipts from the IHOP long term notes receivable and minimal capital expenditures requirements. As I mentioned earlier, dividends paid on our perpetual preferred are up $1 million this quarter versus last year, and the dividend rate now stands at 12%. We expect to continue to use our free cash flow opportunistically by repurchasing our debt when available.

Moving to covenants, we remain comfortably in compliance with our covenants. Our consolidated leverage ratio or adjusted debt to EBIDAR at the end of the first quarter was 5.83 times, compared to the current threshold of seven times. Our debt service coverage ratios were 3.85 times for IHOP and 4.1 times for Applebee's compared to a minimum threshold of 1.85 times. Beginning in January of this year, Applebee's also has an additional 12 month adjusted ESPR requirement, which was 3.13 times compared to the current requirement of 2.2 times. So overall, considering the challenging economic conditions we still face, we are very pleased with our first quarter results.

Now I will turn the call back to Julia for a review of our 2010 outlook.

Thanks, Jack. And before I open the call to Q&A, I want to highlight that we reiterated our financial performance guidance for 2010 which is provided in more detail in today's news release. As a reminder, our consolidated financial performance guidance for 2010 assumes no asset sales. Should company-operated Applebee's restaurants be sold this year, we would update our guidance as necessary in conjunction with our regularly quarter disclosures following any transaction announcement.

We believe that we continue to experience economic and consumer headwinds. We remain focused on executing our strategic plan. This includes differentiating the Applebee's and IHOP brands with compelling advertising, innovative menu offerings, exceptional operations, and relevant remodel programs. Additionally, we firmly believe that offering value in differentiated ways will be a primary competitive advantage for the Applebee's and IHOP brands. Value is what our two brands stand for and it will continue to be a primary success factor as the economy recovers.

With that, Jack and I would be pleased to answer any questions that you might have. Operator?

Yes, ma'am. (Operator Instructions) Please stand by while we compile a list. Your first question comes from the line of Bryan Elliott representing Raymond James. Please proceed.

Good morning, Bryan.

Good morning. A couple questions. First, Jack, if you could maybe review again the store margin disclosure. I'm sorry, I don't have the exact number in front of me here, but I think the reported store margin contraction was 180 bips to 14.8 and I think you went through and said food costs was flat, labor was down and OpEx was up 180 and those don't quite fit I don't think, but I probably have something wrong.

Yes. Actually the year-over-year decline in the margin is about 150 basis points.

Was last year 16.5?

No. 16.3.

Okay. I did have something wrong or rather my staff. Did we change anything?

Actually -- Greg you want to --

Hi, Bryan, this is Greg Kalvin. We had a one 10 basis point change last year due to reclassification in the top line and expense line that we reflected in Q2. So it's actually 16.3 and when we're comparing that to 2010.

Okay, okay. So on an adjusted basis or changing the base last year food costs flat, labor costs down, D and O up 180?

Right, right.

All right, good. Carol's job is safe for now. Next question on, Julia, maybe you could address this partly as well, but certainly there's concern within the investment community about the level of capital expenditures given the lack of refranchisings and, you know, just some concern that I hear on a regular basis about whether we're kind of starving the asset base and what kind of risks that might be setting the stage for. So if you could address that, I would appreciate it.

No problem. So this year we have guided that we'll spend about 20 million in CapEx. Part of that will be to remodel the Kansas City market which as you know is the market that we've identified that we will keep as a company market. There's some additional IT integration work and then as I think I said on the last call, absolutely if we still own the restaurants in 2011, we'll do a much more accelerate and aggressive remodel program and we'll guide for that in 2011, but very comfortable that we'll do whatever we need to on a go forward basis for the remodel. In the meantime the R and M that we're doing and I've been out all last week visiting restaurants, keeps our restaurants in great shape. As the remodel program is finalized, we'll take it on just like anybody else and if we still have restaurants in 2011, then we'll remodel accordingly, a pretty hefty amount of them, but I don't worry at all about that as a major CapEx expense because it more than pays for itself and although we haven't identified a final cost, we're not talking $0.25 million Bryan. We're talking something much more reasonable, so we should be fine.

Maybe if you have it handy a trailing 12 month R and N and a maybe Q1 this year and Q1 last year to get a sense of magnitude of that that runs through the income statement which is essentially CapEx.

You know what? We don't have that here but I can tell you that R and M is not declining. I mean R and M is either flat or increasing.

All right. Well, I'll get back with you offline on the magnitude. Great. Thanks much. I'm turn it back to you. Thanks.

Thank you.

Your next question comes from the line of Destin Tompkins representing Morgan Keegan. Please proceed.

Thank you. Hey, Julia, you mentioned the same store sales for Applebee's especially were impacted by both Easter and weather in the quarter. I'm just wondering should we assume that we get the reverse benefit in the second quarter from that Easter shift?

Yes, you should. I think the bigger issue is that we reguided our comp for the year. So we still reguided that we'll be flat to negative three at Applebee's. So there's nothing that would purport anything is largely different.

Then I guess if we look at that, kind off a normalized basis it looked like trend was kind of at the midpoint of your full year guidance and, is the midpoint a level you're comfortable with that you think is very achievable this year?

You know, it's hard to say. There will be puts and takes but I think reiterating the guidance and then recognizing that we are continuing throughout the year not only with an aggressive marketing calendar, but with some pretty creative merchandising strategies as we go forward for in store. We've got a high comfort level.

Okay. Well, speaking of that, can you talk to how -- you mentioned the value message a couple of different times for both brands, but specifically on Applebee's, how much are you guys focusing on two for $20 at this point? Is national TV going to be primarily focused on the real burgers and how much do you think we'll see two for $20, going forward?

Well, I know we shared this with you, but you may not realize two for $20 is on the menu. It's a permanent fixture on the back of the menu. So it lives and breathes. If you advertise it, the mix goes up to about 25%. If you just keep it on the menu, it hovers around 18, 20%.

So the truth of the matter is, I think consumers like the fact that it's on the menu. That's the feedback we're getting. They like the fact that we refresh it periodically on the menu. So it's a nice sort of constant, you will, that is on the menu and people feel good about it. When you think about the advertising for Applebee's, I think you should think about engineered value. It was a real focus. We brought that up when we first made the acquisition. They have done a wonderful job of having engineered value in the pipeline for the next couple years. So you'll see both, but I think the most important thing you should think about is two for 20 on the menu and engineered value in a very creative way on television.

Okay, great. And then one more. Jack, on the G&A, can you give us some sense, you guys reiterated your G&A target for the year. Last year I think it was fairly lumpy, the way the G&A fell through the quarters. Do you think it will be more ratable as we look at the remainder of the year or should we continue to expect volatility with those G and A numbers in terms of absolute dollars?

Actually I don't have the quarter G&A numbers in front of me, but I would think they're going to be as lumpy this year as they were last year. I would not flat that number through the remaining quarters.

Is there a particular quarter that you expect to be higher than the others or one that's expected to be lower?

Well, always in October we have a higher number because we do the -- both businesses do the annual convention. So in October you have both IHOP and Applebee's national franchise convention and that's always a high number. That one I can speak to for certain. I'm looking at everybody else. I don't know of anything in particular that stand out in any mind other than the convention.

And the other thing that happened in the first quarter is when you compare it this year to last year is we had the co-op expenses in there last year.

Right. That's the second one.

And this year we do not have them in there.

That's a good point. We took the entire $6 million hit in first quarter. That's a good point. Those are the two things I think that stand out.

Okay, thanks.

Your next question comes from the line of Greg Ruedy representing Stephens. Please proceed.

Hi. Good morning. This is Josh on for Greg.

Hi, Josh.

Hi. How you doing? I had a question touching back to the engineering value that you talked about, Julia. Can you talk about how as the two for $20 and the under 500 menu options have been kind of rolled out and you had a little bit more experience with them how you started to leverage that engineering value and just some lessons you've learned there and how that's impacting maybe some of the newer menu items that we're going to see with the new national advertising?

The best way to think about it is engineering products worked and clearly our job is to create profitable growth for our franchisees. So the best way to think about it is we would not be rolling out products unless our franchisees could make a fair profit on them. So this engineering of new products not only creates for profitability for the franchisees, but it delivers unique flavors, unique profiles, items that don't exist anywhere else. I really feel very strongly. If you think about under 550 nobody in America was talking about it or doing it and that creates a differentiation. So it both works from a profitability standpoint and it both works from a differentiation standpoint. So I think you'll see that for the foreseeable future because of those two reasons and again, the other thing that we don't talk a lot about is not only when you create it, you also get to put depth and breadth behind those products.

So you can create categories, brand extensions. It really goes on much further than just putting a product on television. It has all kinds of ramifications. So it's a short winded way of saying not only is it profitable, but it creates differentiation for the brand.

Okay. Thank you.

Your next question comes from the line of Michael Gallo, representing CL King. Please proceed.

Hi. Good morning.

Good morning.

My question is just if I go back to the commentary on the Applebee's company operated margins if food costs were flat, had the creation of the co-op a year ago which I would have thought would have resulted in some savings, you had effective menu pricing and I think the commodity basket at least for most of your peers should have been flat to down in the quarter. So I was wondering why you didn't see food costs down on a year-over-year basis. Was there some kind of mix shift that offset that, or was there something else going on there? And furthermore, now that it's been in place for about a year, what kind of benefit are you seeing to the overall system margins from the creation of the co-op? Thank you.

Well, I'll have Jack answer the company ops question. I'll answer the larger question.

Hi, Mike. Actually what I said in the script is that our food costs as a percent of sales were equal to what they were last year but that in dollars they were down, and essentially what we did or what this allowed us to do, is offer better value items to our guests. So what we experienced in lower food costs we reinvested, if you will, back into better value items for our guests.

And if you think about it, CFCF, which is the name of the national co-op, does continue to make progress both in securing key contracts while it still leverages the size of both the systems and there is all kinds of examples of them doing that. The big item and the big ticket, you will, for this year and we don't have a forecast yet, but there's a real focus -- and I mentioned this on the last call -- in them consolidating distribution centers. So the more we do of that this year, the more upside there will be, but they're doing a great job, and as you know, you now see national chains trying to do co-ops. So we've created a trend, but I think we're pleased with the results and clearly to Jack's point, we're able to do some reinvesting because of that and just to reiterate, the guidance for the year is flat to slightly favorable in food costs.

All right. In terms of just the second part to that question, do you expect the commodity basket to move up in the back half of the year? Are you contracted on a significant number of commodities for the rest of 2010?

So the answer is the guidance I think really answers the question, which is flat to slightly positive for the full year and that's really how we look at it because there are individual differences throughout the quarters and the promotions that we employ. So the best way to think about it is for the full year.

Okay. Thanks a lot.

(Operator Instructions). And your next question comes from the line of Ben Fader Rattner representing Canyon Capital. Please proceed.

Hi, Ben.

Good morning. Your equity has had a really nice run except for today and that's because the market's down a lot. Can you kind of just give us your thoughts on using equity to deleverage your capital structure and kind of just generally how you guys think about the capital structure of today and potentially refinancing down the line?

Ben, this is Jack Tierney. We have talked about this in the past. As most of the analysts know, we do have a shelf in place. The board has not approved anything. We look at our capital structure all the time. We know what has to be done. We really want to refinance our existing debt no later than December, 2012, but we're going to be opportunistic. We're going to look at everything.

We're going to consider everything and really that's about all we can say about that subject. The Board has not approved anything. We have not submitted anything to the board for approval, but we are keeping our options open and we want to be opportunistic in how we address our capital structure.

Great. That's all I had. Thanks so much.

Thank you.

At this time there are no further audio questions. I would now like to turn the call over to miss Julia Stewart for closing remarks.

Well, so thank you all very much. Just to reiterate our next reporting date would be for second quarter and that will be August 3rd. So you can put that on your calendar. In the meantime if you have any questions feel free In the meantime if you have any questions feel free to call Stacy and she'll set it up. We're here for you. We thank you for your time.

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