Dine Brands Global Inc (DIN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 DineEquity earnings conference call. My name is Colby and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to Stacy Roughan. Please proceed, ma'am.

Good morning, and thank you for participating on DineEquity's second 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 and 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 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 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. Two documents are posted under the calls and presentation section of the IR site as supporting material for today's webcast; one that provides an overview of Applebee's and IHOP's remodel program, and the other that is a summary of our debt structure. If you haven't already done so, we encourage you to download the presentation. Additionally, on this call we may refer to non-GAAP financial measures. These non-GAAP financial measures are described in our news release today, which is also available on our website. Now, I will turn the call over to Julia Stewart.

Thanks, Stacy, and good morning. We are pleased with our solid second quarter 2010 performance . Let me take a minute and recap some of the key highlights. We experienced our third quarter of sequential improvements in same-restaurant sales for Applebee's. IHOP's same-restaurant sales were solid relative to the competitive set. We continue to sustain Applebee's restaurant operating margin improvements during the quarter. IHOP franchisees opened 21 new restaurants as we continue to track our goal of opening 60 to 70 new franchise restaurants this year. And, we have retired securitized debt in the amount of $26 million for the quarter, and $81 million year-to-date. All in all, we continue to make progress on all fronts.

We remain dedicated to our revitalizing plans for Applebee's, and ensuring that IHOP creates an insurmountable lead in family dining. Additionally, last week we announced the sale of 63 Company operated Applebee's restaurants in Minnesota and parts of Wisconsin in line with our strategy to become highly franchised Company.

Let me walk through a few of the details of our second quarter performance. Starting with same-restaurant sales, Applebee's domestic system-wide same-restaurant sales decreased 1.6% for the quarter. Our results included a favorable comparison to the Easter holiday last year, which positively impacted our results by approximately 40 basis points. Taking this timing into account, Applebee's same-restaurant sales would have performed closer to negative 2% for the second quarter. This continues our improvement trend for the third consecutive quarter.

Applebee's domestic franchise restaurants performed at a negative 1.3% comp level, which included positive franchise same-restaurant sales results for the month of June.

Now, at Company restaurants, domestic same-restaurant sales decreased 2.6%. Our traffic performance at Company restaurants improved from the start of the quarter to the end. Effective pricing increased 1.6%, the majority of which was carryover pricing from previous periods. Year-to-date, domestic system-wide same-restaurant sales decreased 2.2%.

We're encouraged by improved same-restaurant sales trends at both Company and franchise restaurants. We believe that Applebee's focus on value-oriented differentiated food offerings supported by enhanced marketing efforts and improved service, and operations at our restaurants are beginning to provide us with clear competitive advantage.

At the time of the Applebee's acquisition, guests told us loud and clear they'd come more often to Applebee's if our food was better. To that end, we've made meaningful progress in the transformation of Applebee's menu. Today, more than 80% of our menu items are either new or improved compared to the end of 2007. New items like Unbelievably Great Tasting and Under 550 Calories, and Real Burgers and improved items like the chicken fingers are resonating with guests. On June 14, we launched a new exciting product category, Sizzling Skillet Entrees. Starting at $8.99, Sizzling Skillets offer guests something new and uniquely Applebee's at a great price point. It creates a strong value perception for the brand, and is value engineered to be a profitable performer for the system. We are very encouraged by the impact the Sizzling Skillets promotion is having on our performance.

We are also pleased with the success of our efforts around building our bar and late night business. Through events and other promotions, we have been able to drive a new segment of our business. This has increased our bar mix to 13.3%, up nearly 100 basis points over this past year and is also a contributing factor to the better same-restaurant sales performance our franchisees have experienced recently.

In short, all of our marketing, menu and operations revitalization efforts are working together to deliver a differentiated experience for Applebee's guests. Therefore, we are reiterating our same-restaurant sales guidance for the full year in the range of flat to a negative 3%.

Turning now to IHOP. Beginning with same-restaurant sales, IHOP's domestic system-wide same-restaurant sales decreased 1% for the quarter. Our performance was negatively impacted by timing issues around the Easter and 4th of July holidays. Which negatively impacted comps by 10 and 30 basis points respectively. Taking these factors into account, IHOP's same-restaurant sales would have performed closer to a negative 0.6%. IHOP's month-to-month comp results were mixed with higher guest check average and negative traffic driving our performance throughout the quarter. Year-to-date, domestic system-wide same-restaurant sales decreased 0.7%.

Now, IHOP continues to focus on value and differentiation to drive momentum in the system. Our limited time offer strategy continued in the second quarter with Loaded Country Potatoes and Pancake Stackers. We also introduced IHOP's popular Kids Eat Free promotion for the month of April. It was a great performer that emphasized value and expanded dinner awareness resulting in positive traffic at the dinner day part. Additionally to capitalize on the grad and dad season, we offered a $5 coupon with the purchase of a $25 IHOP gift card. At the end of the quarter, IHOP launched it's product tie-in with the 3-D animated feature, Despicable Me. It's a terrific partnership that is driving increased awareness for IHOP with the movie's success at the box office.

In restaurant, we are taking fun to a new level with a one-of-a-kind film inspired dishes that can only be found at IHOP. Our Minion Madness limited time offer includes items such as Loaded Minion Taters, CinniMinions and Minion Berry Pancakes. The products are resonating so well with guests, they could become the inspiration for new IHOP favorites to come. With a solid lineup of marketing and limited time offer initiatives planned for the second half of the year, we're reiterating our same-restaurant sales expectations for IHOP ranging between positive 1% and negative 1% for the full year 2010.

IHOP continues to lead family dining, despite the challenging economic and competitive environment. In June, our leading position in family dining was once again recognized by Nation's Restaurant News which ranked IHOP number one in market share, number one in sales and number one in restaurant growth for all of family dining. IHOP also broke into the top 20 for system-wide sales of all restaurants. A huge accomplishment.

Additionally, according to data from the 2010 Technomic Top 500, IHOP is now ranked in the top five of the fastest growing full-service chains in the United States in terms of year-over-year sales. This win, for us, is a direct result of the hard work and dedication to IHOP exhibited by our committed franchisees and team members. Now with franchisees continue to be on track to open 60 to 70 restaurants this year, our success, even in a continued difficult economy, proves we have the right focus and strategy in place to keep the IHOP brand moving forward.

Coupled with Applebee's status as the leader in casual dining in both system-wide sales and number of restaurants, DineEquity is in the enviable position of having the leading brand in their respective category.

Turning now 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 in a moment.

With regard to the sale of Company operated restaurants, we were pleased to have reached an agreement to sell Applebee's Company restaurants in Minnesota and parts of Wisconsin to Apple American Group, our largest Applebee's franchisee, and one of our best operators. This transaction is accretive to our consolidated leverage ratio and furthers our strategic objective of transitioning Applebee's into a highly franchised restaurant system over time. After this transaction, 90% of our Applebee's restaurants will be franchised.

Now, with regard to selling additional Applebee's Company restaurants, we continue to be very selective in the process to ensure that perspective 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 possess significant operating capability. We will move forward with transactions that meet these criteria and the deals that are financially advantageous. Our goal is to complete transactions that are accretive to neutral to our consolidated leverage ratio. The cash proceeds along with the transfer of lease obligations that reduce our balance sheet liabilities and are removed from our debt covenant calculation are factors that drive our decision to move forward with transactions. While transaction economics will vary from market to market, it is the total financial benefit that we consider.

Finally, I want to discuss remodel efforts underway at Applebee's and IHOP. As Stacy mentioned, we have posted a presentation on our website with details and pictures of our remodel program. Starting with Applebee's, at the time of the acquisition, we set out to revitalize every aspect of the Applebee's brand. From our menu to our marketing to our operations. Our new remodel program represents the next major step in our revitalization efforts. Introduced to the system last month, Applebee's restaurant remodel program, called Connections, was developed with clear objectives in mind. We needed to revitalize restaurants in a meaningful way that is not only true to our brand positioning as America's favorite grill and bar, but is also a place where our guests can feel comfortable connecting in the neighborhood. And it is also essential to increase the energy perception of the brand.

Now as you can see the change is dramatic inside and out. One key lesson that we learned with the previous IHOP remodel, is you have to make change as apparent on the outside as on the inside. The most notable changes include the replacement of the exterior striped awnings with oversized contemporary ones that elongate the building and highlight the facade. The new awnings are LED lit with essence of apple that creates an immediate impact and differentiates us from the competitive set. The exterior color tones are warmer and are complemented by new signage, new stone accents and elevated tower rooftops.

Now, inside the restaurant, we removed the pop-culture tchotchkes and added photos and murals. These wall images depict neighborhood schools and sports teams, police officers and firefighters, really the true local heroes, to give the restaurant a distinctly neighborhood feel. These graphics will be tailored for each Applebee's restaurant. We've also updated our lighting fixtures and booth upholstery and carpet. And, we have revamped the bar area with a new canopy, new bar stools and an optional back bar cabinetry. To amplify the changes, we've designed a retraining and recertification program for kitchen staff and team members to use with newly remodeled restaurants.

We also have a publicity plan to generate awareness in the neighborhood as restaurants are remodeled. I truly think it is a wow. And guests think so too. Consumer research tell us we are moving in the right direction. We saw improvements in the guest's revisit intent and likelihood to recommend as well as improved perceptions versus the guest's last visit.

Altogether, the change is really pretty dramatic. It's true to the Applebee's brand, relevant to our guests and we believe will go a long way towards effectively differentiating Applebee's from the competitive set. This year, we expect to remodel a total of 15 restaurants in our Kansas City test market while we anticipate that early adopter franchisees will complete between 100 and 130 remodels. We are going to gain considerable learnings this year and are optimistic that franchisees will see the benefits and more aggressively move to make the Connections remodel a success.

Turning now to IHOP, our next generation program is called the Momentum remodel which launched this past January after successfully completing previous Icon remodel over the past five years. Our objective for the IHOP remodel was to keep the IHOP brand relevant, dynamic and enticing. The IHOP's remodel scope includes remodeled interior and exterior elements that build upon the prior remodel with warm colors, textures and graphics that continue to evolve the IHOP brand.

As I mentioned earlier, we saw a particular opportunity to make exterior changes at the restaurant more prominent. You will see there are the copper colored accents on the building, and new stone work that make the exterior changes more noticeable. Inside, we updated chairs, upholstery, carpeting and evolved wall treatment and graphics, adding richer, warmer tones.

Guests like the changes as well. Consumer research demonstrated that the remodel increased guest likelihood to visit IHOP at all day parts. The changes were seen as exciting, contemporary, comfortable and welcoming.

This year we expect IHOP franchisees to remodel between 225 and 250 restaurants. 45 remodels have been completed as of the end of June, and we are confident that IHOP franchisees will meet their full year commitment. We will also be remodeling our R&D restaurants in our Cincinnati test market.

Turning to remodel costs, Applebee's remodel is expected to cost approximately $150,000 per restaurant, and the IHOP remodel should run at about approximately $50,000. We believe our job, as a franchisor, is to deliver remodel package that is consistent with our brand position, helps to differentiate us, has a positive guest impact and can be implemented for the lowest cost possible. I believe we have achieved this with both remodel packages. Now, I would like to turn the call over to our CFO, Jack Tierney, for a more detailed review of our financial performance for the second quarter

Thank you, Julia. I would like to start today's discussion with a review of second quarter's performance, including key line items for the quarter and year-to-date and then move to the balance sheet and cash flow.

For the second quarter, our adjusted net income available to common stockholders was $15.7 million compared to $20.1 million last year. The year-over-year decline of $4.4 million is the result of lower comparable sales, higher G&A expenses, a higher tax rate and increased dividends on the perpetual preferred shares. These unfavorable items were partially offset by lower interest expense.

Revenues in the second quarter were $339.9 million, down 2.8%, compared to $349.7 million last year. This reduction is primarily due to the decrease in same-restaurant sales, the closure of six underperforming Applebee's Company operated restaurants in the first quarter of this year and franchising of two Applebee's Company operated restaurants in New Mexico in the third quarter last year. These decreases were partially offset by higher IHOP revenues as a result of a 4.3% increase in the number of effective restaurants in this year's second quarter versus last year's second quarter.

G&A expenses for the quarter increased $3 million primarily related to salaries and incentive compensation plans. For the first half, however, G&A expenses are down $4 million compared to last year. You may recall that in the first quarter last year, we spent $6.3 million to establish the cooperative which is not repeated this year. We remain on track to deliver our full-year G&A guidance of $158 million to $161 million. This compares to 2009 G&A expenses of approximately $158 million.

Interest expense in the quarter was $2.3 million better than last year's second quarter and better in the first half by $5.8 million. We continue to benefit from our debt repurchases. On a year-over-year basis, the total debt balance is now down by approximately $175 million primarily through opportunistic purchases.

As Julia mentioned, the Applebee's team has done a terrific job of managing costs while also pursuing strategic traffic driving initiatives. Let's walk through some of the performance factors impacting our Company operated restaurants. For the quarter, Applebee's Company restaurant operating margin was 14.1% compared to 14% last year. The margin was favorably impacted by 140 basis points as a result of a 1.6% increase in menu pricing. This improvement, however, was largely offset by the deleveraging impact of guest traffic declines. Food and beverage costs as a percent of sales are favorable 90 basis points compared to last year. Lower commodity costs, primarily for poultry and oil, improved the margin 50 basis points. The increase in effective pricing improved the margin by another 40 basis points. And, on a net basis, we offset some of this improvement through higher cost related to strategic efforts to improve the quality of core menu items.

We are pleased to report that labor costs for the quarter as a percent of sales were flat versus last year. This was achieved despite the margin impact of lower sales. We continue to achieve labor productivity improvement primarily through the new labor scheduling system that was implemented last year. Direct and occupancy expenses as a percent of sales are unfavorable 90 basis points.

Additional marketing expenses to drive guest traffic decreased the margin by 40 basis points and higher facility costs represented a 50 basis point decline in the margin. In the quarter, we experienced higher costs for repairs and maintenance, depreciation related to remodels, as well as higher property taxes. For the six-month ended June 30, 2010, adjusted net income available to common stockholders was $34.4 million compared to $39.8 million in the first six months of 2009. The decline of $5.3 million is primarily due to lower comparable sales, a higher income tax rate and an increase in preferred dividends, partially offset by lower interest and G&A expenses.

Applebee's Company restaurant operating margin was 14.4% compared to 15.2% in the first half last year. This decline is primarily the result of more promotional activity, unfavorable product mix and lower guest traffic. Partially offsetting these items is the margin impact of a 1.5% increase in menu pricing and improvements in labor and commodity costs. We are confident that the margin improvements that we achieved over the last two years are sustainable. Therefore, for the full year, we are reiterating our guidance for Applebee's Company operating margins to range between 13.5% and 14.5%.

Our income tax rate for the second quarter was 37.2% compared to 31.8% in the second quarter last year and 33.9% in the first quarter this year. The increase in the rate is primarily due to unfavorable state tax settlements in the second quarter this year. For the full year, we are now projecting that the tax rate will range between 35% and 36%, up from earlier guidance of 34%.

There are a couple of other items that I would like to draw to your attention. First, our cash flow from operations remains strong. For the first six months of 2010, cash flow from operations totaled $50.3 million compared to $61.5 million last year. The year-over-year variance is primarily the result of timing on marketing and tax payments. Our full-year cash flow from operations forecast, excluding the impact of the Minnesota transactions, remained unchanged.

Second, in the quarter, we reduced securitized debt by a another $25.8 million. Year-to-date we have retired $80.7 million of securitized debt. Because our open market debt repurchases occurred earlier in the year than anticipated, we are reducing by $5 million our interest expense guidance for the full year. The new range, is $170 million to $175 million. This remains inclusive of $40 million of non-cash interest expense.

Third, at the end of the second quarter, we remain comfortably in compliance with our debt covenants. Details are presented in today's news release, and supplemental information is posted on our IR website. Let me remind everyone that our leverage ratio for adjusted debt to EBITDAR is 5.96% versus the covenant requirement of 7%. Since acquiring Applebee's, we have reduced our total outstanding debt by $405 million, or 16%. The consistent ability to pay down debt in these challenging economic conditions reflects our stable cash flow from operations, steady and reliable receipts from the IHOP long-term notes receivable and, as a franchisor, minimal capital expenditure requirements. We will continue to use our free cash flow opportunistically for debt repurchases.

Looking at the details on the sale of 63 Company restaurants in Minnesota and parts of Wisconsin, as Julia mentioned, this transaction is accretive to our consolidated leverage ratio as defined by our debt covenants. The impact on our leverage ratio when selling restaurants is a key deal consideration. Scheduled to close in mid-fourth-quarter, the transaction will deliver $105 million of financial benefit to the Company. We will reduce securitized debt by $28 million. We will also reduce sale leaseback related financing obligations by $46 million. And, we will remove $31 million of operating lease obligations for debt covenant purposes. On an annualized basis we will also save $2 million of G&A expenses as a result of this transaction.

Moving to financial guidance, as we committed to earlier in the year, we have updated our guidance based on the sale of 63 restaurants. The impact on guidance is mostly related to cash flow. We reduced cash flow from operations by $10 million. This decrease is primarily the result of payments for trailing liabilities directly attributable to the restaurants, taxes on the sale and reduced profit contribution from the closing date of the sale to year-end. The reductions in cash flow from operations will also result in a corresponding decline of $10 million in free cash flow. Of course, this guidance could change slightly depending on the closing date of the sale.

So, overall, considering the challenging economic conditions we still face, we are very pleased with our second quarter and first half results.

Before I turn the call back to Julia, I want to touch briefly on the potential refinancing of our debt. I receive a lot of inquiries on this subject. With two plus years to go, we have plenty of time. That said, we also understand how volatile the debt markets can be. To that end, we actively monitor the market and we will be prepared to act when the time is right and the cost and terms are optimal for us. Now, I will turn the call back to Julia.

Thanks, Jack. In closing, I want to return to a comment I started the call with. We remain focused on executing our strategic plan for Applebee's and IHOP. This includes differentiating the Applebee's and IHOP brands with compelling marketing, innovative menu offerings, exceptional operations and relevant remodel programs. While we expect continued volatility in economic and consumer environment, 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 for our business. With that, Jack and I would be pleased to answer any questions you might have. Operator?

(Operator instructions) We will pause for a moment to gather the list. Your first question comes from the line of Destin Tompkins with Morgan Keegan. Please proceed.

Thank you. My first question is on the free cash flow reduction or the cash flow from operations reduction that you mentioned of $10 million. Can you give us some idea of how much the trailing liabilities are versus the reduced contribution? It seems like, given that it's so late in the year, the reduced contribution piece would not be that large. Can you give us some -- I guess quantify the pieces there, a little bit?

This is Jack. Essentially, of the $10 million, we really quantified $4 million of that as being taxes. The difference between $32 million that we talked about as cash proceeds versus the $28 million that will run through our securitization. So, the balance is really a combination of profit reduction and trailing liabilities. And, you are right, we are thinking that the transaction will close mid-November. So, the profit is going to be the smaller of the remaining balance. Most of it is going to be the trailing liabilities.

Okay. And then, is there a -- do you have an idea of the reduced interest expense or the interest expense savings from the $105 million benefit?

The interest expense, it would appear on our P&L, is going to be a reduction on the $46 million on the financing obligations and the $28 million on the security side debt. If you use the rate of about 8%, you will probably get to about $700,000 for the remaining term of the year. The balance of the year. After the close.

Okay. That's helpful. And then, on the remodel program, Julia, do you have a sense on the timeline that you would like to have the Applebee's system remodeled? Is it three or five years? Do you have a goal there at this point?

Well, we told the franchisees we would like to move as quickly as possible because we know that will have a positive impact on how the guest views the brand and all that goes with it. I think this is the year that people have to get comfortable with it. There are lots of franchisees that are going to test it, they're going to be early adopters, we will have several more restaurants in Kansas City. I think by the end of the year, there will be a comfort level and then I truly believe they will go as fast as they possibly can. I think I mentioned in prior calls our contract, our franchise agreement, requires every six years. So, if you went to the nth degree, it would be six years now. I truly believe it will go faster. I think I will have a better sense of how quickly and how much towards the end of this year. Frankly, the guidance call in early next year will have a much better handle because we would have done so much additional work and people physically doing our remodel and getting comfortable with them.

And, on that piece of the franchisees that are required to remodel their stores every six years, is there a large percentage of those that are overdue for a remodel?

No, that percentage is fairly small. There is a small amount of people that are overdue. But, the large majority are right on track and I think they are excited about the opportunity. As I said, I think people doing it this year, that 100 to 130 of early adopters, really helps the whole business.

Great, thank you.

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

Good morning. Julia, I wondered if you could take a minute and address what you see going on in the competitive set in casual dining underlining consumer activity and maybe what your thoughts are on this segment as a whole?

Well, casual dining is in an interesting state. There are a lot of regional players that are doing everything they can - a lot of heavy discounting. They're not people that you normally see on television. They are, sort of, the local folks that are doing a lot of discounting and then you do have national competitors that are doing an awful lot of discounting their existing products on television because there really is not a lot of pipeline for them. I think what makes Applebee's uniquely different is that, all year long we have been value engineering products that we put on television. So, we make money, franchisees make money. But, those are really unique differentiated products. It is not taking existing items and discounting them. I think that, inherently, is an advantage that we have and a key differentiator. Frankly, we are investing in a whole bunch of new categories for people to really try in the marketplace, on our menu. Whether it is the Under 550 and Fabulous, whether it was the Skillets - there is a lot of effort being made for us to expand our brand and our menu depth and breath. I don't see that in the competitive set. What I do see is a lot of discounting and people just trying to do whatever it takes to bring people on. And I would argue that is beyond even restaurants. You see a lot of that in retail, right now.

But, industry is seeing for the first time in a while increased average check. You are seeing increased average check. Would that not imply that the magnitude of discounting is lessening?

Well, that is a mixed bag, Bryan, it is hard to say. I think, people are trying to, obviously, cover any shortfall that they have and there are, as you know, a lot of tricks of the trade to drive average check. I think, in general, there is just a lot of turmoil in terms of what to do next. And, if I can be shameless for two seconds, that is what I'm really most pleased at is that we are sticking to our strategy - very focused on the value engineering and I think, for us, it is a competitive differentiator.

Have you seen the impact of the Skillets, is that traffic benefit seeming to offset any ticket issues with that or where the pricing is on that?

Well, you know, we don't comment on inner quarter, but the one comment I could make is we are very encouraged by Skillets and what we have seen so far.

Okay that is marginally helpful. Thank you.

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

Thanks very much. Similarly related to the last set of questions, can you give us an update on where you stand today as far as mix from the Two for $20 initiative? And, to the extent you can talk about it, I think you indicated the Skillets were launched in mid-June. Are you seeing through quarter end any significant mix for either the Skillets or under 550 Calories?

I think the mix on Two -- you started your question with Two for $20 -- I think the mix on Two for $20 is about the same as it's the last couple of quarters. I think it is slightly down about 18% if you think about the last couple of quarters, I said it was more like 20% or 21%. So, I think Two for $20 is about 18% of the mix and Skillets is plus or minus about 5% of the mix. And the Under 550 and Fabulous is probably around 4% to 4.5%.

Recognizing its early, any thoughts on the potential for conflict from the remodels for Applebee's?

I get asked that question a lot. I truly believe that if I could separate what you get from ops and what you get from menu and what you get from the remodel, I probably would be in New York making $30 million per year. That is just a joke. I do think you have to put it all together and all of those things drive overall comp. I am not sure we will ever be able to give you a definitive number just like we could never do it at IHOP. How much do get from advertising? How much to get from menu? How much to get from remodel? How much do you get from the ops? When you put it all together, it drives results and that's what we're really focus on at Applebee's just as we were at IHOP. But, certainly, overall, franchisees will invest if they see that it is giving them a boost in addition to everything else. But, the actual number, I don't know if I ever be able to give you a number. Because I think it is part impartial of the strategy.

Great, and then one last question if I may. We talked about this in prior quarters, where does the financing environment stand for refranchising and congrats on your ability to get the 63 done.

Well, I'll give you the -- I think the overall comment is a lot has not changed since the prior quarters. I think what we are seeing is pretty much the same as we have seen in prior quarters. There's no question that these deals take a considerable effort and a long period of time. We have been working on the Minnesota and Wisconsin deal for some time. So, I would tell you not much has changed. But, I would tell you we still have interested buyers in markets and we continue to work on those deals.

Great, thank you.

Your next question comes from the line of John Ivanko with JP Morgan. Please proceed.

Hi, thank you. I'm just curious, in especially, Julia, as you've at the helm for Applebee's brand for the last couple of years. Your approach to Sizzling Skillets maybe differs from previous attempts at -- the brand has run what was to be a fairly similar product. Whether it is, as you said, value engineering or the amount you spend on national advertising or maybe it is just the products themselves. In other words, from what I remember to be somewhat similar to previous years, how you are going to sustain, what is clearly success of this product that maybe wasn't sustained in previous periods.

I think that is a fair question. I wish we moved a little faster on the reengineering. But, be that as it may, I think the most significant comment that I made today is 80% of our menu is either new items or improved items. The fact that we did that in less than three years is pretty phenomenal. I think by the end of next year, if you ask me what that mix is, it's going to be considerable. We all know that people don't come in every other week to our restaurant. It does take time to get people's perceptions to change and then to come in and try one of those two items. Candidly, I think that is our single biggest difference is that we've made so much headway on changing new and improving existing items that had not been done previously. So that is the big, aha. Obviously, improved marketing that resonates with the guests makes a difference in their perception of how they see Applebee's on top of everything else that we have done. That is the biggest difference, I think, between now and prior attempts, if you will. We are finally hitting on all cylinders and we're sustaining our ops improvement, our service scores, our improved menu items, now launching the remodel and obviously much better advertising, if you will, that resonates with the guests. When you put all that together, it is never been done before.

Okay and that's a fair answer. A question on the remodels, I was actually, given the pictures online, it was striking that you were able to get so much for $150,000 so congratulations on that. Could you comment -- a lot of people with QSR and even casual dining will say, the more you spend, the more you get. Can you take a crystal ball and say, this is kind of a base case remodel at $150,000, where if you can spend more, you should spend more? What is really the thought on the direction of per unit spend going forward and from yours perspective is it something necessary to suspend your business or have you actually seen sales increase from the business? I know it is difficult but on the unit to unit basis of those which have been done versus those which haven't been done.

Thank you so much for asking that question it is a great question. First and foremost, and I didn't say this in my prepared remarks, the interesting comment that comes out of your question is we did the same thing at Applebee's that we did at IHOP. We tested it very low-cost remodel. We tested a medium cost remodel. And, we tested a high-end cost to remodel. Interesting, the results at Applebee's are the same as IHOP. The one that made the greatest impact on guest's perception of the brand was the medium one. This approximately $150,000 or so. The exact same results we got when we first tested the remodel five years ago, which was a pretty dramatic change for IHOP. And we pride ourselves on trying to do the absolute lowest amount to get the highest impact. What you really have to give credit to is the franchisees and the co-op who really worked hard at trying to save costs anywhere possible. So that cost really is sort of been engineered, if you will, and franchisees, I am sure, we'll find additional savings as they roll this out this year because it's in the DNA of the franchisee -- much the same way they did at IHOP. When you think about it, that cost of $150,000 is an approximate. Do I think some will come in lower, closer to $125,000? Yes. Do I think some franchisees will choose to spend a little bit more because they've got high-volume units and they think they want to spend that extra money? Absolutely. Do we have those options available for franchisees? You bet. But, on average the $150,000 mark has been a good overall number for us. But, when all is said and done, you'll have some franchisees spending less, some franchisees spending more. In the short tenure that we have those tests stores in Kansas City that did all the ranges of the remodel, we've had slightly up to double-digit comp increases. So, it has been a little bit all over the board which is why we have been hesitant to sort of throw around the numbers because we are a work in process. But, I feel really good about the way we went about it. Which is testing the minimum, the maximum, and the in between. It is interesting that guests resonated with that in between one which is what you are seeing online with the exception of the back bar was an option. I happen to love it, but it's not critical. It's not critically necessary to extract change. As I said before with the IHOP answers, doing something different on the outside gets people's attention and says, wow what is different, let me go inside. We think we learned all the way around, but, I am certain we're going to get more learnings the balance of the year working with the franchisees who have been terrific about volunteering to early adopt and take one or two on.

Thank you.

Your next question comes from the line of Greg Rudy with Stevens. Please proceed.

Thanks, good morning. You maintained the Applebee's operating margin guidance year-to-date. You're running near the midpoint there, with your higher average weekly sales quarters behind you. My question is, can you approach or exceed the high-end of that margin guidance given the current sales levels? Or do we need a sequential improvement?

I think what we've talked about is we will take a hard look at third quarter and at the end of third quarter we will either revise guidance or leave as is. But, we think we need one more quarter to have a comfort level on whether or not we should revise it or leave it. But I think we'll have a much better handle at the end of third quarter whether we should tighten that guidance or extended it a little bit higher.

Okay. You mentioned that there was a -- you made 100 basis points date on the late night sales mix. How much contribution of the probability was that?

We are not ignoring the question. I am not certain we have that at our fingertips.

Okay. Can you talk about the impact to that late night business from rolling out UFC pay-per-view and price breaks on alcohol?

Let me talk in general terms and I think if we can get you the answer we will circle back on the actual percent of profitability. We do not have that at our fingertips. We are working feverishly to see if we can't easily get that. From a late night perspective and a bar perspective, there are three things worth noting. One, again, touting our franchisees, there are some franchisees in the system who have been doing a terrific job. So, we definitely took best demonstrated practices, and share that with you will system. Both the company operations adopted that, as well as additional franchisees. We have franchisees who have seen huge gain by the work that we have been doing with everything you just mentioned as well as other promotions. The Skinny Margarita, the enhanced marketing, the enhanced suggested selling, all of the work combined we have been doing is very, very helpful. There is no question we have seen some our franchisees have these huge increases. Clearly, we have this opportunity. We're going to take advantage of it. We think we can do more than we currently have done. The fact that we have moved 100 basis points in a short period of time tells that plus or minus. I think we will see more of that. I think the balance that with our brand positioning. But, I've been very encouraged what we have seen thus far especially with some of our key franchisees who have seen some really hefty increases.

Great. That was good color. Switching to the remodel. On Applebee's side. At what point do you have enough remodels out there to adjust your TV spots and showcase the connections program and how important a TV message be in place for a franchisee to want to put capital to work?

Great question. I am happy to tell you that when you watch the commercial today it is actually shot inside the new remodeled restaurant. So take a look at it and you will tell. It's a pretty close up view. I think there is certainly opportunity if we think there is real value to show some of the exterior and the interior as we move on. We can certainly do that. I don't think the franchisees really note that as a necessary evil to really make this work. I think it is all about the testing that is going to go on additional part of the year and their comfort level that, we made this investment and we feel good about the return. I don't think that's enough necessary component of the advertising piece.

Okay. Last one, I will pass it along. You mentioned retraining. Any impact to the model this year? Is that something we should be looking for in '11 and if you talk about what sort of retrain is necessary?

First of all the short answer is none. It's the minimum impact. I asked the question of the team early on. I think what they managed to do, again thinking very creatively both operators on the franchise side and the Company side, have figure out a way to sort of incorporate this training in already things they're existing doing. So, it's not like they're bringing in the whole crew for an extra hundred hours and it is separate. They've figured out a way, if they roll out, they include this sort of upgraded training in their regular schedule. It's not really incremental. Interestingly enough, I think it is an important strategy and part of the holistic approach because candidly when people walk into a remodeled restaurant, their expectations get a little bit more enhanced. I think all of this additional training and recertification really exceeds or meets our customers expectations. I think it is brilliant that they came up with that because it really is interesting. If you ask people if they have a higher expectation of a remodeled restaurant, the answer is yes. So, I think they're meeting or exceeding that. But, no, it's not anything that you have to worry about from a cost perspective.

Okay is that opportunity to reset the bar and weed out under-performance.

We have really done a great job on both sides of the business with that AB criteria that we put in place some time ago. To really raise the bar and we have seen a huge increase in operating service scores, as I mentioned earlier, the highest they've ever been in US history. There is always a chance to raise the bar. But I think this has more to do with delivering in a manner that is befitting of the new model. Always a chance to raise the bar. But, I don't I don't worry about leaving out because really don't have any DF operators anymore.

Right, thank you.

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

Hi, Chris.

Chris has left the queue. Your next question comes from the line of Michael Gallo with CL King. Please proceed.

Hi. Good morning. Two questions, most of my questions have been answered. In terms of the remodels, I was wondering if it's too preliminary, if you know exactly what you plan to do in terms of company unit remodels for 2011? On the Applebee's side, do you expect to do a significant number or do you expect just to step up from the test market this year. Just some further clarity on that. Thank you.

Sure. If you think about it, after the Minnesota and Wisconsin deal closes, we have about 330 restaurants left. Assuming we didn't sell another restaurant, what's that -- about $50 million investments spread over the next several years. Yes, it's about $50 million spread over the next several years. When we do our guidance in early 2011, we will give you exact numbers for 2011. For this year, we will finish up the Company Kansas City market and that is in our CapEx guidance.

So, it is fair to assume, even over the next few years, assuming no other transactions.

That is correct.

Second question I have just on the transaction, are the operating margins of the stores being refranchised similar to the company average, or is there a significant deviation there?

You know, they are a little bit less than what our average is. It's not enough to move the needle this year at all. I think, next year when we talk about margin improvement over this year, we will have to call that out as one of the reasons. But, it is not really a significant driver this year it is probably not significant next year, either. Other than for the reconciliation of margin.

Okay, great, thanks a lot.

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

Good morning.

Good morning, Chris we lost you.

I apologize. I got disconnected. My question relates to the sale of the 63 stores and I apologize if this has been asked. I'm glad it drove financial leverage, but, would describe, Jack, the overall cash impact of the share holders. And by that, I mean, was the receipt of the cash proceeds plus the use of those proceeds and G&A reduction and future CapEx reductions - Was that the equivalent to the loss of the cash flow at the store level over a certain period of time? And give an understanding of what the impact to shareholders overall cash.

You know what, I am not sure I follow your question. But, in terms of how we set the price on what we are going to sell the units for, we essentially look at the cash flow that we will achieve, let's say over the next five years, six years and put a terminal value on that. Discounted back to a present value, and that's what we're looking for from a buyer for the restaurant. So that, ideally, we are indifferent in terms of whether or not we maintained a restaurant. And achieve the cash flow over the next five or six years or resell the restaurant.

That's exactly what I was asking. So, this transaction resulted in that indifference model working?

Yes.

Okay, thanks, guys.

This now concludes the Q&A session I will now turn it over to Julia Stewart for closing remarks.

Well, we thank you very much for being present today and to reiterate, our third quarter 2010 call will take place on November 2, and as always, if you have any questions, please feel free to call any of us in management. Alright, take care.

Thank you for your participation in today's conference is concludes the presentation, you may now disconnect, good day.