Dine Brands Global Inc (DIN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 DineEquity earnings conference call. My name is Grace Ann, and I'll be your conference operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to Ms. Stacy Roughan. Please proceed, ma'am.

Good morning, and thank you for participating on DineEquity's third 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 from 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 in our most recent 10Q filing with the Securities and Exchange Commission. In addition, DineEquity disclaims any intent or obligation to update these forward-looking statements. Now, I will turn the call over to Julia Stewart.

Thanks, Stacy, and good morning, everyone. We are very pleased with our strong third quarter 2010 performance and more recent developments for the Company. Let me recap some of the key highlights. Applebee's same-restaurant sales were up significantly, posting our fourth quarter of sequential improvement and our first positive quarterly performance since quarter one 2008. IHOP same-restaurant sales also turned slightly positive for the quarter, and continued to perform better than our closest competitors. We continue to drive Applebee's restaurant operating margin improvements during the quarter, and are working to capture more profit in line with our stronger same-restaurant sales performance. IHOP franchisees opened nine new restaurants, as we are on track to meet our goal of opening 60 to 70 new franchise restaurants this year. We also announced the pending sale of 56 Company-operated Applebee's restaurants in parts of Missouri, Illinois and Virginia, as well as completing the sale of 61 Company restaurants in Minnesota and parts of Wisconsin in the fourth quarter 2010.

And finally, we successfully refinanced the Company with an attractive bank and bond structure, and the redemption of 99% of DineEquity's perpetual preferred stock. Our business fundamentals are strong. Applebee's revitalization strategies are taking hold in a meaningful way. The sale of Company-operated restaurants has moved materially forward. IHOP continues to optimize its marketing, menu, operations, and remodel strategies to build upon its lead in family dining. And, we eliminated the risk associated with our previous capital structure with a transaction that is accretive to EPS. All in all, I could not be more pleased with all that we have accomplished to date, and the positive momentum we are creating in every aspect of our business. So, let's walk through the details of our third quarter performance. Starting with same-restaurant sales, Applebee's domestic system-wide, same-restaurant sales for the quarter compared favorably to last year, increasing 3.3% year-over-year.

Applebee's domestic franchise restaurants performed at a higher level, with a positive 3.8% comp. And at Company restaurants, domestic same-restaurant sales increased 1.2%. Our performance at Company restaurants reflected a combination of higher guest check average, including menu price increases of 1.7%, which was partially offset by guest traffic declines. Year-to-date, domestic, system-wide same-restaurant sales are performing at the better end of our guidance range, decreasing 0.5% compared to the same period last year. Applebee's performance is clearly leading the competitive set, and is the result of the comprehensive brand revitalization strategies we have been employing since the acquisition. Improve operations, innovate and improve the menu, enhance marketing, and, of course, the new remodel introduction. All of these efforts are focused on differentiating the Applebee's brand and offering guests a unique experience that they cannot get anywhere else. Today, Applebee's is benefiting from an all-time high in guest satisfaction. We are delivering a great guest experience, and continue to raise the bar from an operations excellence perspective.

Since the acquisition, more than 80% of our menu is now either new offerings or improved neighborhood favorites with better, fresher ingredients. Unique new promotions like Sizzling Skillets or Great Tasting and Under 550 Calories, along with the new items available on our two-for-$20 lineup, are setting standard for innovation in the category. We have our 2011 pipeline of new food items ready for introduction. Applebee's "There's No Place Like the Neighborhood" advertising campaign is resonating with guests and driving awareness. We are focused on communicating the everyday value that our brand stands for. We are strategically advertising price points for products that have been value-engineered to be profitable performers for our system. And, we are driving our late-night business through beverage and appetizer innovation and local restaurant marketing efforts around sports and holiday events. The positive momentum in the Applebee's system is building. With every meal we serve, with every beverage we pour, we are bringing neighborhood to life at Applebee's restaurants nationwide.

Looking ahead, we're set to launch our fifth menu update this year, which will include great new healthy dining choices in both our Under-550 and Weight Watchers, among other enhancements. Our new product promotion, Flavor Loaded Steaks, launches November 9. It is designed to build equity around Applebee's as a destination for a great steak, one that is differentiated with unique flavors you can only get at our restaurants and a great value starting at a nationally advertised price point. We are also excited about Applebee's upcoming national event to honor veterans and active duty servicemen and women. On November 11, Applebee's is inviting America's veterans and active duty military coast-to-coast to enjoy a free entree in honor of Veterans Day. Last year, we served more than one million meals, and we expect that number to be even higher this year. This effort is the largest of its kind to give back to the communities where Applebee's restaurants are located nationwide. And it is a privilege for us to serve our veterans and active duty military, our local neighborhood heros on this national day of respect, and remembrance.

We also are entering the holiday season, which is our busiest from a gift card perspective. We are offering a $10 bonus gift card with a qualifying $50 gift card purchase, which should bode well for redemption activity in first quarter 2011. We will also continue to leverage the power of our third-party relationship that distributes Applebee's gift cards to nearly 100,000 retail outlets nationwide as well as in-restaurant sales. Now, from a remodel perspective, franchisees are tracking to the high end of our expectations as early adopters are expected to complete a approximately 130 franchise restaurant remodels before year-end. And from a Company perspective, we will complete 14 restaurant remodels in our Company R&D market of Kansas City this year. It's terrific progress that we expect to build upon in a meaningful way in 2011. In all, we believe Applebee's should end 2010 in a strong position, and therefore, we have increased our full-year guidance on domestic, system-wide same-restaurant sales to range between positive 1% to negative 1%.

So, let's turn now to IHOP. IHOP has demonstrated multiple years of success that are rooted in a similar approach to revitalizing strategies employed by Applebee's. Energize the brand, improve operations, and maximize franchise development. IHOP's dedication to these strategies has allowed us to protect the brand during the economic downturn, and will position us for market share expansion as the economy recovers. For the quarter, IHOP's domestic system-wide, same-restaurant sales increased slightly at a 0.1%. IHOP's month-to-month comp sales results were mixed, with higher guest check average and negative traffic driving our performance throughout the quarter. And while better than our major competitors, year-to-date domestic system-wide, same restaurant sales decreased 0.4%. IHOP continues to emphasize value and differentiation to drive system momentum. Our performance for the quarter reflected the promotion of limited time offers, Minion Madness and Super Rooty Tooty, which were both unique to our brand and leveraged our core breakfast equities.

Additionally, IHOP featured our popular Kids Eat Free dinner promotion in August, which contributed to positive comps for the month. It was a great promotion that emphasized value and expanded dinner awareness, resulting in positive traffic at the [dinner-day part] Now, in September, IHOP launched a new system-wide menu, which includes new breakfast, lunch, and dinner items, along with our new Simple and Fit format. Integrated throughout the menu, our new Simple and Fit items make it easier for guests to choose lower calorie options that taste great and meet their nutritional needs. Numerous Simple and Fit item menus are under 600 calories, and now all of our kid's items are under 600 calories. With our innovation around Simple and Fit, IHOP is now providing resources in ways that are easy to use and designed to give guests tips to make dining choices that meet their needs. Looking ahead, IHOP launched our sixth limited time offering yesterday, Festival of Flavors, which includes Cinnamon Apple Crepes, Banana Bread French Toast and Pumpkin Praline Pancakes. It's a unique fall offering available only at IHOP, that provides our guests with the abundant value IHOP is known for. It's a great way to end the year.

IHOP is optimizing our gift card approach in 2010 with a continuation of our third-party gift card distribution partnership that we introduced last year. Third-party distribution enables IHOP gift cards to be sold at more than 20,000 retail locations nationwide, including supermarkets, big box discounters, and broadline retail stores. It's a simple and effective way to extend the IHOP brand and enhance consumer awareness, in addition to continued in-restaurant gift card sales. New restaurant development remains on track, as we expect franchisees to open between 60 and 70 locations this year. And IHOP will reach an important milestone in the coming weeks as we prepare to celebrate the opening of our 1,500th restaurant in Washington DC. IHOP is the fifth fastest growing full-service restaurant chain Company. We have a committed pipeline of more than 300 franchise restaurants, which will continue to drive robust development for years to come. Finally, IHOP remains on track with the adoption of our second generation remodel program, which was introduced to the system at the beginning of 2010. Through September, franchisees have remodeled 110 IHOP restaurants, and we are on track to meet our expectations of 225 to 250 remodels by year-end. I believe IHOP is doing all the right things to protect and grow the brand. And as a result, we expect to meet our domestic system-wide same-restaurant sales performance range for 2010, which is between positive 1% and negative 1%.

Turning now to Applebee's Company operations, the team is doing a good job of focusing on profitability improvements, but we clearly have an opportunity to drive more profit to the bottom line. Jack will provide you with more detail in a moment. More recently, in the fourth quarter 2010, we successfully completed the sale of 61 Company-operated Applebee's restaurants located in Minnesota and parts of Wisconsin. The transaction generated $28 million in after-tax cash proceeds, and reduced sale-lease-back related financing obligations by $46 million. We expect to complete the sale of the two remaining restaurants in this transaction before year-end, as additional time was required to complete documentation for the transfer of leases related to these properties. With regard to the sale of Company-operated restaurants, recently we signed an asset purchase agreement for the sale of 20 Company-operated Applebee's restaurants located in the Roanoke and Lynchburg market in Virginia. This transaction is expected to close before year-end, and will result in after-tax cash proceeds of $12 million and the assignment of $15 million of worth of sale-lease-back related financing obligations.

In addition, we announced an asset purchase agreement for the sale of 36 Company-operated Applebee's restaurants located in St. Louis, Missouri and parts of Illinois. The transaction is expected to close in the first quarter 2011, and is expected to result in after-tax proceeds of $26 million and the assignment of $11 million worth of sale-lease-backed related financing obligation. In addition, we expect these transactions will result in more than $4 million in annualized G&A savings in addition to the CapEx savings associated with the sale of Company restaurants. All of these transactions further DineEquity's strategic objective of transitioning Applebee's into a more highly franchised restaurant system over time. A more heavily franchise business model is expected to require less capital investment and reduce the volatility of our cash flow performance over time. And with regard to selling additional Applebee's Company restaurants, we continue to be very selective in the process to ensure the prospective buyers are financially qualified, that they share our vision for revitalizing the Applebee's brand, that they're willing to reinvest in the business and that they possess significant operating capability.

We will only move forward with transactions that meet these criteria and with deals that are financially beneficial long term. Turning now to our refinancing, I'm pleased to say that we successfully completed a $1.8 billion refinancing three weeks ago. With this refinancing, we have addressed our previously complex capital structure in a holistic manner while taking advantage of favorable conditions in the debt market. We minimized pre-payment penalties associated with replacing our securitized debt structure while also redeeming 99% of our Series A perpetual preferred stock. We now move forward with a more favorable capital structure that maximizes our financial flexibility and allows us to focus on executing our growth plans for both the IHOP and Applebee's brands. Now, I'll turn the call over to our CFO, Jack Tierney.

Thank you, Julia. I would like to started today's discussion by adding to Julia's comments about our refinancing. Then I will provide a review of third quarter's financial performance, including key line items for the quarter and year-to-date. The goal of our refinancing was to eliminate refinancing risk when all of the securitized debt matured in 2012. We also wanted to put in place a new capital structure with attractive interest rates, extend our maturities on the debt and have the ability to reduce debt and leverage over time from our cash flow. Our new bank and bond structure achieved these objectives. Let me touch on the key highlights of the new capital structure. We put in place new bank and bond debt totaling $1.8 billion. The bank debt is comprised of $900 million in a seven-year senior secure term loan, and a $50 million senior secured revolving credit facility. Our bank loans will bear interest equal to LIBOR plus a spread of 450 basis points, subject to a floor on LIBOR of 150 basis points. Today, this represents a 6% interest rate.

We also issued $825 million of eight-year senior unsecured notes at par, with a coupon of 9.5%. Interest on our bonds are payable each year in the months of April and October, beginning in April 2011. The weighted average after-tax cash interest rate on our new debt is 4.6%, compared to 4% on the old debt. However, including the 12% after-tax cash dividends on the perpetual preferred, the weighted average cash payments on the old capital structure was 4.9%, or 30 basis points higher than in the new structure. As a result, pro forma after-tax cash savings on the new structure is $7.3 million annually, or $0.42 per share. I'd also add that on a GAAP basis, the savings are $1.56 per share. As you know, the expected maturity on our previous securitized debt was December 2012. Under the new bank and bond structure, we have significantly extended the maturity of our debt. The bank loans will mature in November 2017, and the bonds will mature in November 2018. Under our credit agreement, we are required to comply with a maximum consolidated leverage ratio and a minimum consolidated cash interest coverage ratio.

These covenants begin in the first quarter of 2011. At that time, the covenant for the leverage ratio will be set at a maximum of 7.5 times, defined as total net-debt-to-EBITDA on a trailing four-quarter basis. We will also have a minimum cash consolidated interest coverage ratio, which is 1.5 times EBITDA on a trailing four-quarter basis. These thresholds are subject to step down or step up as appropriate over time. At the end of the third quarter 2010, our leverage ratio would have been 5.8 times, and our interest coverage ratio would have been 2.1 times if our new debt structure had been in place. Moving to the cost associated with the refinancing, we incurred approximately $56 million of transaction costs for the new debt, and we will amortize this amount over 7.5 years. Additionally, in the fourth quarter 2010, we will take a pre-tax charge of $106 million, or $64 million after-tax. The pre-tax charge will include a $60 million write-off of deferred financing costs for the old debt, and a $46 million charge for pre-payment penalties and tender premiums to retire the old debt early. We expect to receive the tax benefits from these charges over the next six months.

We also addressed the most expensive portion of our capital structure by redeeming $187.8 million of the $190 million of the Series A perpetual preferred stock. This cost us $195.3 million, inclusive of a $7.5 million redemption premium. We funded the preferred redemption through the use of proceeds from our bank and bond transaction and from the Minnesota re-franchising. When we close the two outstanding locations in the Minnesota deal that Julia mentioned earlier, we will then redeem the remaining $2.2 million of perpetual preferred stock. We expect this to occur before year-end. Finally, the refinancing is accretive to earnings based on a combined reduction of interest expense and preferred dividends. We were able to complete the refinancing without diluting our share shareholders. We are very pleased with the results. This is an excellent outcome for our shareholders as well as for our franchisees, team members and vendors. Now, turning to a discussion of our third quarter and year-to-date financial performance.

For the third quarter, our adjusted net income available to common stockholders was $16.6 million, or $0.95 per diluted share, compared to $16.8 million or $0.97 per diluted share last year. The slight year-over-year decline of $200,000 is primarily the result of higher dividends on the perpetual preferred, partially offset by lower cash interest expenses. For the nine months ended September 30, 2010, adjusted net income available to common stockholders was $51.1 million, or $2.92 per diluted share, compared to $56.6 million, or $3.30 per diluted share in the first nine months of 2009. The decline of $5.5 million is primarily due to a higher tax rate and higher dividend payments on the perpetual preferred stock, partially offset by lower cash interest expenses. Tax rates for the third quarter and year-to-date increased compared to the same periods last year because of higher favorable settlements with state taxing authorities in 2009 versus 2010. Revenues in the third quarter were $335.4 million, up $1.8 million versus last year. Year-to-date revenues were $1.033 billion, down $25.5 million, or 2.4% compared to the first nine months of 2009. The year-over-year decline is primarily due to lower sales at Applebee's Company-operated restaurants.

In addition to the year-to-date, same-restaurant sales decline of 1.7%, Applebee's restaurant revenues were negatively impacted as a result of selling seven Company-operated restaurants in New Mexico in 2009, the closure of seven Company-operated restaurants in 2010, and an unfavorable shift in sales weeks due to the 53rd week in 2009. These decreases were partially offset by higher franchise revenues at IHOP, which are up primarily due to a 3.7% increase in effective restaurants. The $3.5 million increase in G&A expenses for the quarter was primarily due to higher payroll related costs, including non-cash stock-based compensation. G&A expenses on a year-to-date basis, however, decreased $500,000 due to the one-time cost of $6.3 million incurred last year to establish the purchasing co-op, partially offset by higher expenses for non-cash, stock-based compensation. We remain on track to deliver our full-year G&A guidance of $158 million to $161 million, which compares to 2009 G&A expenses of approximately $158 million. This would make G&A expenses essentially flat to last year. Interest expense in the quarter was $2.4 million lower than last year's third quarter, and $8.2 million lower on a year-to-date basis. This is the result of average debt obligations declining $171 million over the past 12 months.

Now, let's walk through some of the performance factors impacting our Company-operated restaurants. For the quarter, Applebee's Company-operated restaurant margin was 14.8%, compared to 13.6% for the same quarter last year. The 120-basis point improvement was primarily due to increased menu pricing, favorable promotion and mix changes, and a favorable property tax adjustment. These gains were partially offset by margin deleveraging due to traffic declines, higher incentive expenses, and increased repair and maintenance costs. For the nine months of 2010, Applebee's Company-operated restaurant margin was 14.6%, compared to 14.7% for the same period in 2009. Food and beverage costs as a percent of sales are 60 basis points better than last year, despite the increases in food quality that Julia mentioned. Based on our improved sales restaurants outlook for the year, we have increased our restaurant operating margin guidance for Applebee's restaurants to range between 14.25% to 15%. We expect our income tax rate to range between 35% and 36% for the full year, exclusive of income tax benefits related to our refinancing.

Turning to cash flow, our cash flow from operations remains strong. For the first nine months of 2010, cash flow from operations totaled $97.5 million, compared to $102.9 million last year. The year-over-year variance of $5.4 million was primarily the result of increased tax payments and the timing of gift card activity, partially offset by non-recurring retention payments. We increased our full-year guidance for cash flow from operations by $20 million, to range between $155 million and $165 million. This increase is the result of timing on interest payments for our bonds, lower projected cash taxes and improved operating results expected in the fourth quarter 2010. Partially offsetting these increases, are the payments of trailing liabilities resulting from the re-franchising of the Roanoke and Lynchburg markets in the Commonwealth of Virginia. So, overall, we are very pleased with our third quarter and year-to-date results and the successful completion of our refinancing. Now, I will turn the call back to Julia.

Thanks, Jack. In closing, I want to emphasize that 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. 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. We plan to talk about this and more, at DineEquity's upcoming Investor Day in Kansas City next week, on November 8 and 9. And whether you attend in person or listen to the webcast of the day, we hope to provide you more insight into our brands and our business and how we're setting our Company up for success now and in the future.

Finally, we also recently completed two very successful national franchise conferences at Applebee's and IHOP. Once a year, our franchisees gather with leadership from each brand and our shared services group and vendor partners to focus on how we can make our businesses better. Together, we set our vision for the future, and determine on how we will achieve our goals in 2011 and beyond. Both brands have a tremendous amount of momentum behind them, and our franchisees could not be more passionate and committed to building on our leadership positions in casual and family dining. With that, Jack and I would be pleased to take any questions you might have. Operator?

(Operator Instructions). And your first question comes from the line of Chris O'Cull of STRH.

Thank you. Good morning, guys.

Good morning, Chris.

Julia, it appears that Applebee's same-restaurant sales really accelerated the last few weeks of the quarter. Is that true? And if so, kind of help us understand what's the driving factor behind the sequential acceleration in the quarter.

There's no question that it is true, because we pre-released the first 11 weeks that we continued to do well, very, very well. But we've been doing well through the quarter, but there's no question that we continued to do well, and it is why we have changed our guidance for the balance of the year. So, you should take credence in that. And I really believe it's what I said. I think all of the things that we've been working on so hard for the last couple of years have finally come to fruition, both the menu, both the advertising, and the like.

Okay, great. And just by use of some basic algebra here, it looks like we saw mid-single-digit kind of improvement the last few weeks by the franchisees?

Okay, I'll take that algebra.

Okay, great, thank you. And then Jack, would you help us understand the impact to operating cash flows of selling the 119 units overall? Meaning, if you exclude just the settlement of network and capital liabilities, what is the annualized cash flow from operations impact to selling these stores to franchisees?

Chris, are you referring to an EBITDA multiple? I mean, essentially what we've told people is --.

Cash flow -- .

Okay, just cash flow -- .

I'd just like you to explain the accretion from the refinancing. Can you help us understand what's the impact to cash flow from operations from selling the stores?

Yes, essentially, as we have said before, essentially our goal is to sell the stores at a level that is accretive to our debt covenants. But as a practical matter, we're probably more in the range of five to six times EBITDA when we sell these stores or restaurants. There are some trailing liabilities in those numbers that we include, and we also present them when the deal closes.

Okay, great. And then lastly, it sounds like, Julia,, this new steak promotion you're very excited about, is there any difference in the quality of the portions, or is the focus -- it sounds like it has a national advertising price point. Can you give us a little more detail around what this promotion looks like?

Well, I don't want to say the price point, because it's sort of highly competitive in this environment. But the best way to think about it is, it's a variety of steaks. The first steak starts at seven ounces, then the second steak is, I believe, at nine ounces, so they get bigger. But the real value, if you will, is these toppings. And we have a variety of toppings that consumers have told us they love, they want, and varying flavors, Chris.

Think of it as, you get different flavor profiles. You get different toppings, and it's a starting out for a smaller steak, which has been on our menu for some time. We did do some re-engineering on that steak, over a year ago. So, all good, and it's 100% edible USDA select steak. So, we think that will play well for us.

Okay, great. Thanks, guys.

Thank you.

Your next question comes from the line of Bryan Elliott.

Good morning. Just actually clarification, I guess, on the term loan. You talked about the timing of the interest payments on the bonds. What is the equivalent on the term loan? Is that a monthly?

Bryan, it depends on what we select on LIBOR. If we're selecting a 30-day LIBOR, it's paid 30 days, et cetera. If it's two months to three months, it's whatever the selection is on LIBOR.

Okay. So, there could be certainly a build-up of interest payable on both pieces then, depending. Okay, all right, that's helpful. I'll get back in the queue. Thanks.

Okay.

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

Thank you. Julia, you mentioned all the improvements you're seeing. I guess in same-store sales, we saw that in the third quarter, and all the factors that are driving that. And it sounds like there's some positive momentum, and you think it's building. And then I think I also mentioned, or heard you mention, something about the opportunity for you to drive more profitable Company operations.

I'm just wondering, as you see that opportunity both to drive sales and margins, if you feel like you're capturing that value, that opportunity in that five to six times EBITDA multiple that you're able to sell these restaurants at. Would there be any consideration to either holding out for a little better value, or waiting until you've realized some of these opportunities?

Yes, I think the best way for you to think about it is, let me answer the first part of your question first, which is, on Company operations, you'll never get me to say that we can't do more. I mean, that's just inherently who and what we are. We always think that we can get a little bit more, get a little bit more. But I think the low-hanging fruit is gone. We said that on the last two calls, that we did the majority of the low-hanging fruit in 2008, and the first part of 2009. What's really left now here, is you get more topline, you can leverage it. I think the Company operators have demonstrated to us that they'll do everything they can once they get topline. Now, they're not doing as well on the topline as the franchisees, but I think as we do get topline, they'll leverage it.

As it relates to selling the Company units, and we've mentioned this before, and I'll say this again, it's not a simple case of just what's the right number? A lot of different variables go into selling these Company restaurants. We're not like anything else out there, because a lot of the other chains, and fast-food especially, sell one off. We sell 50, 60, 70 units at a time. So, it's a very interesting kind of relationship, and what kind of buyer you are looking for that has access to capital, that has capability, that has extreme operating capability to take over that many restaurants. And literally, you have to find the right person that is looking to reinvest for the long term, do the remodels, be involved. It's a very special kind of relationship that we're trying to create with these buyers. And so, I think there's more than just the actual price that goes into this equation.

But clearly, we look to do the best that we can for sales, and clearly our strategy has always been to get rid of the Company restaurants, and be 99% franchised. Having said all that, we're not in a hurry. So, we'll take our time, and be very thoughtful about what's that right scenario. And as you know, things are not selling at eight and 10 times out there. I'm not sure they ever have been. So, I think the reality is find the right mix, and find that sweet spot, which works for the franchise buyer and works for us as the seller.

So, it's not a simple equation, it obviously involves a lot of factors. But we're very comfortable with what we've done thus far, and what we're continuing to do in the future. And the buyers are terrific franchisees, who we think will go on and be a part of our business for 20, 25, 30 years or more. So, again, I didn't mean to elongate the answer, but I do think it's more than just the simple proceeds, and the number that we sell at.

Sure, thank you. And then on the restaurant operating margin improvement that you saw. I think when you had pre-released, there was some indication that maybe most of the leveraging would be offset by higher labor and utilities, which I know you mentioned were there, you felt, in the quarter. But was there anything that changed dramatically? Was it the improvement in those last two weeks? Or was there some expenses that came in a little bit lower than you expected that drove that improvement?

Yes, it did get better towards the end of the quarter. But as we think about it, we were a little bit disappointed that we didn't bring more margin to the bottom line. But not tremendously. It was pretty much on track.

Okay. And then lastly, Julia, a menu question for you. It seems like that both brands, you've been pretty proactive in adding some nutrition disclosure to the menu around the 550 at Applebee's, and now the Simple and Fit, I think it is, at IHOP. Do you foresee that nutrition disclosure requirements could be a headwind for the industry or for your brand? Is there some thinking behind being proactive there? Is it just in trying to anticipate those requirements?

Three things. One, both brands have, in part of their sort of marketing mantra, that they feel strongly about creating nutritional value for the menus. There's been some recent research that's gone on that suggests that when you ask consumers when you think of chains that support your healthiness, very few come up, except for Applebee's. And I think now with what IHOP has done, IHOP will come through. So, there's no question we want that as part of a larger piece of our marketing strategy, and we frankly are the first out there. And, as you know, first in gets the greatest opportunity.

So, we're very pleased with the work and the effort that we've done. Is it going to be a huge mix driver for us? Probably not. But does it provide a halo for both brands in terms of an image and a precipitation that we care about your health, and we care about your nutrition, and we want to do the right thing and educate you? Absolutely.

So, I think that the credit goes to the brands for being very forward-thinking about it, and being first out there with that kind of competitive communication. And I see us doing more of that. But the work that we've done at both brands has been extremely well received by the guests. Now, the Simple and Fit has only been out there probably five, six weeks. But the initial results have been incredibly favorable, and the fact that we are the only major chain in America with every single kids item on the IHOP side under 600 calories, we've received press from the Obama administration. It's been incredible.

So, the answer is yes, we feel good about it. We're very thoughtful about it. It's very strategic. And we've gotten a lot a of good press from our guests, which is what really matters.

Thank you.

Your next question comes from the line of Resiva Hoffina of Barclays Capital.

Good morning.

Good morning.

Good morning.

Congrats on the results.

Thank you.

On the operating margin, Jack and Julia, you talked about margins, you didn't bring down as much margins to the P&L as you would have liked. And then you talked about the higher labor expenses despite the higher sales. Can you talk about what's going on there that can improve in following quarters, in terms of bringing more margins down to the bottom line with the better sales? And where are you with the new labor scheduling tool? And any other thoughts you have on your operating margins going forward.

There's two things. I'm glad you asked the question as a follow-up. One, there's no question that our guidance is up for the year on operating margins, and it's because we feel comfortable about all the work that we have in play, which is both the labor tool, certainly food cost. A lot of the leverage in that middle of the P&L comes from improved topline.

But there's no question that the labor table has taken hold, and there's no question that the food cost will be slightly favorable this year, even though we're doing all of this work on the menu. And that's as a direct result of the co-op. So, I think between the food cost work, and the work they're doing on the labor model and tabling, which is fully in execution, that's why we're so comfortable with the revised margin guidance. And I think our hope is, and belief is, for next year we'll be able to capture some of that as well.

So, we're very optimistic on the future, and partly it's because of the work they have in play. And they're doing some work in the back-of-the-house with efficiencies, and there's all kinds of tools they're using in the back-of-the-house. Very simple tools, not expensive, not costing money. But more just what I would call good common sense of things we can do to drive leverage in the back-of-the-house. That is part and parcel why we revised guidance.

Right. And Resiva, earlier, when we did pre-announce our comp sales, we kind of told people, hey, be a little cautious here in terms of assuming all of this is going to the bottom line. That doesn't mean that internally we're not hitting our numbers. We're hitting what we put in our plan. Our expectations are in line. We just didn't want the street, if you will, to get carried away.

Got it. And then as far as remodels for 2011, and new store openings by franchisees, I know it's early days, but any initial thoughts?

Yes, I think history is always a predictor of the future. So, if you think about the last several years, we've been 60 to 70 units a year at IHOP. We'll issue guidance in March, 2011, and we'll give you a firm number on that. And then on remodels, we've been doing 250, 260 on the IHOP side every year. We'll give you a firm number on guidance.

The one big change would be on the Applebee's side. We'll have a better sense in 2011 of what remodels are going to be by the guidance. But the good news is the early adopters in 2010 are very excited about the remodel. We'll have a lot more sort of detailed data, if you will. We'll be able to provide you a lot more, especially pre-post net of control.

We'll have a lot more of that data in the guidance call. But all initial indications on the Applebee's side are very favorable, very positive. And IHOP is doing extremely well on its second go-around. So, ask those firm questions on the guidance call, and I'll be able to give you some very firm numbers for 2011. But clearly, if history is a predictor, you'll see some good numbers again in 2011.

Thank you much.

Thank you.

Your next question comes from the line of John Ivankoe of JPMorgan.

Hi. A couple of questions, and one actually a direct follow-up on that. Regarding Applebee's remodels, Julia, did you just say that you don't want to commit to a number yet for fiscal 2011, that we should wait a little bit for that?

Yes, we'll do that on guidance. I'll have a better indication of what the commitment level will be. The early adopters are just getting their feet warm, understanding it. If you give a remodel to a franchisee, they can figure out how to do it for less money. So, we're doing a lot of that work. But that will come on the guidance call, the actual number.

Okay. Can I ask you, I guess, what you think the optimal investment is that you're seeing from the early adopter, and what kind of sales lift that you're seeing from that investment?

It's too soon on the sales number. Clearly, it's positive, and I'll have a better range for you next year because we'll have more pre-post net of control. But the best way to think about it in a franchise environment, is the franchisees are incredibly supportive. They're working it through. They're trying to figure out if there are ways they can take cost out of it. If there were issues, we'd be hearing about it. I think they're very supportive. They recognize they need to do it, it's been a very long time since Applebee's has had a remodel. We want to stay relevant with our guests, and they're averaging about $150,000 on average give or take a little bit on either side.

Okay. I know this is also pretty early, but has the removal of the uncertainty of your own capital structure significantly changed the access to capital for your franchisees? Are they telling you that it's materially open, whether it's financing for remodels or even financing for acquisitions?

I've said before, there are so many factors that go into a franchisee wanting to make a purchase for these Company restaurants. And I think I've said before, it's not necessarily that franchisees didn't have access to capital. It was whether it was affordable or not. And you'll always get some of that dialog about whether it's affordable or not. But I will tell you there's a psychological, I think, benefit going on with the franchise community about this notion that we've refinanced, and done it so successfully. And I am hearing more franchisees be bullish about the brand, about the whole notion of sales and the future. I think there's a lot more psychological benefit going on than probably anything.

Okay. Just one final question, if I may. Is there an opportunity to fix the floating portion of your debt? I mean, do the terms make sense at this point? Is that something that you'd like to -- do you lock up further in your capital structure?

At this point, we're not going to do that, but it is something that we'll look at periodically to see if we want to do that. There is a floor on the LIBOR of 150 basis points. So, where LIBOR is today, and where that floor is, there's some room to move without moving that 6% interest rate. So, it is something we're going to look at. We'll continue to look at it, but at this point we're not doing anything.

Okay, thanks. Congratulations.

Thank you very much.

Thanks.

Your next question comes from the line of Peter [Soleil] of Kelsey Advisory Group.

Hi, good morning.

Good morning, Peter.

How are you?

Good.

Just quick question on the new menu rollout in the next couple of months. Will you be taking additional price with that menu?

Are you talking about the Applebee's menu.

Yes, the Applebee's menu.

Yes, I think the way you should think about it is, most likely not a real specific price increase. But when you put new menu items on, you're effectively pricing because those items didn't exist before. What our job is to think about those being in line with the rest of menu. But there's not been a huge strategy about taking some increase, if you will, of any substance. There may be a small de minimus, less than 0.5 a point just because of the nature of effective pricing, but nothing of substance.

Okay. Then on the late-night business at Applebee's, can you talk a little bit more about the strategy there to drive traffic?

Oh, yes. There is no question that there is a huge opportunity, and it comes from two pieces. One is this notion of staying open past midnight, which if you've seen our commercials, all of them now say, open until Midnight or later. That is really starting to have an effect, just the notion of being open later. And then these programs that we are doing, designed to really be very much enticing to people to come in later at night, whether it's the beverage program we've been working on, the Skinny Margarita, which is under 100 calories for a Margarita, which if you know anything about a Margarita, is a big deal. Or this notion of programs where you're basically teaching a consumer to come late-night because you have these activities, right? You're sort of creating this whole notion of getting in a routine of coming late at night.

There's no question that that is having a major impact, and in fact, some of our franchisees are reporting some really, really large numbers late at night in terms of an increase. So, that is having a major, major impact. So, the way you should think about it, is about 82% of the system is now open Midnight or later. And I think that's really driving just this interest level, right? And it's just creating this -- didn't exist before, a place to go. And again, it's really about our appetizer menu late at night, and our beverage menu, and this notion of creating, whether it's the UFC or watching a game. There's just a whole group of America that loves going out and being a part of a larger group at night. And we're starting to capture that. It's actually fun to watch.

Okay. Can you just give us an update on the two-for-$20 in terms of percentage of sales?

Yes, for the last several quarters, it's been hovering -- the actual number for this quarter has been 19.7%. But it stays about 20%, give or take, and has for some time. And to refresh your memory, it's on the Permit Menu. It's been on the Permit Menu for probably well over a year. And every time we advertise it on television, we provide new menu items. So, I was there Saturday night, and I had the stuffed meatball, which is to die for. And that stuffed meatball is a brand new item that is going on two-for-$20. So, it's creating new items, exciting items, but that mix is staying pretty consistent at 20%.

Great, and then my last question is on the 63 restaurants that are going to be sold in Minnesota and parts of Wisconsin. It looked like last quarter there was $31 million of operating lease obligations for the debt covenant calculations that was also going to be a benefit. Can we assume now that you've refinanced that we're not getting that benefit anymore?

We still get that benefit, but it's not part of our covenants. Our covenants today, under the new refinancings, does not include the rental piece. It's not an EBITDAR calculation any longer. But in fact, the buyer is assuming those leases.

Okay, great. Thank you very much.

Thank you.

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

Thanks, good morning.

Hi, Greg.

I wanted to circle back to your comments on the extended hours, and just the same-store sales from the franchisees at Applebee's in the quarter. How much of their lift is coming from extended hours? And are the remodels already driving part of that comp? And can you break that out for us? And then, how should we view that gap between franchise and Company-owned over the next few quarters?

We don't disclose that level of detail. I think the way you should think about it is, all of the things we're doing. So, the advertising, the marketing, the menu, the late-night hours, all of that contributes to comp sales. And when we give the guidance for next year, we'll factor in all of those items into our number. But the way you should think about it is, it's all contributing.

Now, in fairness, not every single market and not every single restaurant has an opportunity to be open really late because of whatever the trade area exhibits. But there's no question that we've seen some real opportunity, both in some of the Company markets and the franchise markets. But we don't disclose that level of detail. But you should think about, and I think I mentioned this last quarter, us very much focused on each of the day parts at Applebee's to drive sales.

Okay. I know you haven't given next year's guidance, but just more big picture inflation, what's the level of inflation that you think you can offset through the menu and operational initiatives that you're discussing? Really, where is the break point before you need to price?

That's a great question. We're doing a lot of work as we speak on what does it look like for 2011, and inflation and how can we, to your very point, whether it's pricing or the work we're doing on the menu? There's no question that the early reports are that there's going to be inflation in 2011. I think what our work is really, is how much, if not all of that can be taken away by the co-op, which I think is a huge competitive advantage, that we have the co-op purchasing for 3,500-plus restaurants.

So, I think right now we're working with the co-op, as well as with our marketing team on the actual calendar for 2011, and trying to figure out if part, if not all of that inflation can be offset. So, we definitely are standing in a good place. But I'll have a final number for you come the guidance on what it's looking like. But you kind of took the words out of my mouth, right? It's the combination of the menu work, the marketing work, and the co-op that we'll try to take any of that inflation away for 2011.

Okay.

Or pricing, if need be.

Quick housekeeping question. I think, Jack, you mentioned $4 million of G&A savings. Is that on all three of the re-franchising deals, or is that just these last two.

No, it's all three of the deals.

Okay. Thank you.

Thank you.

Your next question comes from the line of Jonathan Waite of Precipio Research.

Hi, just a follow-up on that G&A question. If we take that on a unit basis, it looks like you're getting maybe $30,000 to $40,000 in savings per unit. Is it wise to straight-line that out going forward for your future re-franchise transactions?

It is. You should assume $40,000 approximately a restaurant. There'll be a little bit of bump up and down depending on whether -- at a certain level, you take out a vice president or the like. But you should pretty much presume it's $40,000 for every single restaurant. We've mentioned that before. That's a good number to use.

Okay. Thanks.

Yes.

Your next question comes from the line of Michael Gallo of CL King.

Hi, good morning. Just a couple of follow-up questions. First on the G&A question, Jack. The $4 million of G&A that you'll save, is it fair to just take that out year-over-year? Is there anything else positive or negative this year that would make that G&A not simply move down, straight line by that roughly -- .

No, you would take that, but there could be some timing with that. When we sell the stores, we don't immediately reduce all that G&A. So, it will be reduced, but there is a little bit of timing related to that.

But in general, so $3 million, $3 million to $4 million is probably a reasonable expectation for full year 2011?

Yes.

Okay. Second question that I had, just wanted to follow up on the commodity question. You currently are locked in on a significant amount of commodities for 2011, and all things being equal, what kind of comps do you think you would need on the Applebee's Company stores to hold margins flat next year? Thank you.

Yes, we'll give you some of that detail on the guidance call. As I mentioned earlier, we are smack dab in the middle of looking at, how do we make certain that we don't have any inflation next year. So, we'll have a lot better handle on comp sales and margin and co-op numbers and food costs, all of that on the guidance call.

Thanks very much.

Your next question comes from the line of Micah Kaplan of Bank of America.

Good morning. Most of mine have been answered, but just quickly, it looks like the last couple of quarters is kind of the spread on the Applebee's side between the franchise performance and the Company comp performance has kind of gapped out a little bit. I just didn't know if you could maybe provide any more color on the structural difference there. And then why that may have spread out over the last couple of quarters?

Yes, that spread between Company and franchise has been going on for a while, and it goes back and forth. Some years franchise is ahead of Company, and there's been a time when the Company's ahead of franchise. I think the way you should think about it, because it's not a simple answer. There's lots of things that go into the Company and franchise, one of which is where the Company restaurants are located, in Michigan, in the northeast and some of the other markets. So, some of it is geography.

Some of it is timing on the pricing, as the franchisees have taken more aggressive pricing at the beginning of the year than the Company operations. Some of it has to do with late-night. Some of the Company-operated markets are not in places where there's a lot of late-night capability, juxtaposed to the franchisees, there has been. So, there's a lot of factors that go into that.

But I think the way you should think about it is, in general, at least for this year, it does appear that the Company has been trailing the franchisees in comp sales. And we'll give better guidance for that next year on what we think will happen. We'll have a better handle on whether franchisees are taking pricing or not, and frankly, what some of the other scenarios are in the marketing strategy. But yes, there's no question for this last, it's been over 12 months, that there's been that leading-lagging.

Got you. That's all I had. Thank you.

Your next question comes from the line of Ward Davis of Sierra.

It's [Kyrus Global]. Hi, guys. Question on the re-franchising deals that were done. I'm just looking it at the last three in total, and it looks like there was about 119 units sold. If I apply about a $2.1 million average unit volume, and assume about a little less than a 16% EBITDA margin, which I guess is a little bit below where you guys are running right now. If I look at the gross proceeds on the deal, about $72 million, and I look at what that lost EBITDA is, which I guess is about $40 million before your G&A savings. If I add back the franchise fees associated with those stores, it looks like it's about $10 million.

So, and I guess you're going to get about $4 million in G&A savings, and then I guess there will be some interest savings. But it still looks like there's a pretty big gap between the EBITDA or restaurant-level profits that you're giving up in the transaction versus what you're getting back in franchise fees. Am I looking at that right?

Yes, we always said from the very beginning that we would be selling EBITDA when we sold those Company restaurants. And you have to take the puts and takes of G&A, the puts and takes of the franchise fee, right, the royalties. But there was never any question from the very beginning, we would be selling EBITDA, but what would be left is a very steady state of cash flow that would take all the risk out of it from a Company operations perspective. I think what we should do is take that offline, and go through your scenario, and walk you through it. Jack can give you a call offline.

Okay. And then just one last question on that. When, after these transactions are done, Apple American group will have about what percent of your system in total?

About 10%. Is that about right? I'm looking around the room. It's about 10%, yes. We have great franchisees, a lot of them are very large. I think we've probably got half a dozen franchisees that own anywhere from 50 to 100 restaurants. But there's no question, Apple American is the largest. Great franchisee.

Your next question comes from the line of Stephen Errico of Locust Wood Capital.

Hi, thank you for taking my call. I'm new to this story. I'm trying to drill down on the free cash flow. Could you tell me -- you mentioned you increased your free cash flow guidance for the year, and part of it was to do because some interest expense went into next year. Can you tell me what that increment is? That's my first question.

Yes, I mean essentially, what we did do is -- the way the interest is working now on the bonds, we pay them each October and April, or every April and October. So, for our interest expense this year, we won't be making those bond interest expense payments until April. And it would have improved the cash flow guidance by, I would say , $15 million to $17

Okay. And then for me to build out our model in looking for next year, one of the things that goes away is the preferred dividends paid goes away. But by the same token, and what the other gentlemen were trying to get at, is we're trying to figure out how much we need to reduce the EBITDA by next year for what you've sold. Have you given us a number for what we should take the EBITDA down for, for what was divested? It sounds like it's at least $30 million?

Yes, essentially, what we have told people is that we're looking at selling or re-franchising restaurants at the range of between five and six times EBITDA. So, if you take the total proceeds from those three deals -- .

And what were those proceeds?

Let me just see. Minnesota was cash proceeds of $26 million, I'm sorry, St. Louis was $26 million plus the assumption of sale-lease-back debt of $11 million. Minnesota was $28 million cash proceeds and sale-lease-back debt of $46 million. And Virginia, $12 million in after-tax proceeds, and $15 million in sale-lease-back debt. So, if you take the total of that, we basically have told people that we're between five and six times EBITDA multiple.

Okay. All right. We can get to it that way. Thank you.

All right.

And this concludes the question-and-answer session for today's event. I will now turn the call back over to Ms. Julia Stewart for closing remarks.

Operator, thank you so much. We really appreciate you all taking the time today. Just to remind you, our next reporting date where we'll do both guidance and full-year results, will be March 3, 2011. So, look forward to that, and have a great day. Thank you so much.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect.