Dine Brands Global Inc (DIN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 DineEquity investor conference call. My name is Chanel, and I will be your operator for today. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to Ms. Stacy Roughan. Please proceed.

Good morning, and thank you for participating on DineEquity's fourth quarter and full-year 2010 and 2011 guidance 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 Julia and Jack, let me remind you of our Safe Harbor regarding forward-looking information. Today, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different from those expressed or implied in such statements. We caution you to evaluate such forward-looking information in the context of these factors, which are detailed in today's news releases, as well as in our most recent 10-Q filing with the Securities and Exchange Commission. The forward-looking statements made today are made as of the date hereof, and assumes no obligation to update or supplement any forward-looking statements.

In conjunction with our prepared remarks, we have provided additional information to aid investor modeling of the sale of Applebee's Company-operated restaurants for your viewing on our IR website at DineEquity.com. The document can be found under the calls and presentations section of the IR site, posted as supporting material for today's webcast. If you haven't already done so, we encourage you to download the materials.

Additionally, on this call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news releases today and are also available on DineEquity's IR website. Now I will turn the call over to Julia Stewart.

Thanks, Stacy, and good morning, everyone. Today we'll review our fourth quarter and full-year 2010 results, as well as discuss our outlook and performance guidance for 2011. We've got a lot to cover so let's get started.

We are very pleased with our strong fourth quarter and solid fiscal year results. Importantly, our business fundamentals are strengthening. Applebee's revitalization strategies are delivering results, and 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 from a corporate perspective, we eliminated the risk associated with our previous capital structure, with a refinancing transaction that was accretive to EPS.

All in all, I could not be more pleased with what we've accomplished to date and the positive momentum we are creating in every aspect of our business. For 2010, it was a tale of two halves, if you will, where the first half of the year was more challenging from a same-restaurant sales perspective than in the second half of 2010, both brands, same-restaurant performance turned positive as our strategies took hold and we began to see signs of the economic and consumer environment stabilizing.

Let me provide you with more detail around our performance, beginning with Applebee's. Applebee's continues to gain ground as our holistic approach to marketing, menu, operations and remodel initiatives continued in the fourth quarter of 2010. Applebee's domestic system-wide same restaurant sales increased 2.9% and 0.3% for the year, meaningfully outpacing the competitive set. This growth represented our second quarter of positive sales performance, and it was Applebee's first full year of positive results since 2005. Same-restaurant sales performance at Company-operated Applebee's for both periods reflected an increased average guest check that more than offset negative traffic results. However, franchise restaurants experienced positive traffic for the quarter. Applebee's guest check average for the quarter has remained fairly steady at just under $13 for the system, which is a competitive benefit, as Applebee's retains a strong value position with our guests.

Now, for Company and franchise restaurants, October was Applebee's strongest performing month during the quarter. Comp growth moderated somewhat in November and December, as a result of the Flavor Loaded Steaks promotion, comparing less favorably to the stronger performing "2 for $20" promotion featured in the fourth quarter last year. And during the fourth quarter, we also launched our fifth menu update for 2010, which included great new healthy dining choices in both our Under 550 and Weight Watchers offerings, among other innovations. Applebee's Under 550 offerings has grown to approximately 4% of our sales mix, which can increase to as much as 7.5%, with national advertising. "2 for $20" also remains a strong performer, at about 17% sales mix, increasing to 20% when featured in our national media campaign.

Late night continues to play a healthy role in Applebee's overall same restaurant sales performance, with positive traffic results for both the quarter and full-year at the late night day part. For 2010, late night accounted for nearly 13% of total sales. Currently, 82% of Applebee's domestic system is open until midnight or later, seven days a week, and another 10% operate extended hours on Friday and Saturday night. During the fourth quarter, Applebee's alcohol sales mix reached an unprecedented 14%, the highest mix in Applebee's history, and testimony to the brand's appeal as America's Neighborhood Bar and Grill.

Gift card sales ended on a strong note with nearly $165 million in system sales during the quarter, including $90 million generated from our third party distribution relationships. Gift card redemptions were approximately 7% of Applebee's sales in all of 2010. We also celebrated Veterans Day during the fourth quarter, with Applebee's second annual national event to honor veterans and active duty service men and women. We served more than 1 million of America's veterans and active duty military a free entree in honor of Veterans Day, in one of our strongest traffic-driving days of the year. This effort is the largest of its kind to give back to the communities where Applebee's restaurants are located nationwide, and it's a privilege for us to serve our veterans and active duty military, our local neighborhood heroes, on this national day of respect and remembrance.

From an operations perspective, we continue to raise performance expectations around AB operator rating programs, to ensure operational excellence throughout the Applebee's system. In 2010, 88% of our franchisees were rated as an A or B operator. To further enhance our operational performance, we also implemented a new guest experience measurement program, which is designed to better measure the aspects of the Applebee's experience that matter most to our guests. We will be able to understand not only what they saw during the guest visit, but how it made them feel. Applebee's also continued to enhance the profit performance of our Company-operated restaurants for both the quarter and year, reflecting the benefit of improved sales performance with better management of food and labor costs driving bottom line results. Jack will provide you with more details around this in a moment.

Turning now to remodels, I'm pleased to report that Applebee's has completed 205 remodels to date, 14 of which were at Company restaurants in Kansas City. The connections remodel is being well-received by franchisees and guests alike, and is performing in line with expectations. Our largest franchisees have been early adopters, and are seeing terrific results, particularly as they remodel entire markets at a time, as has been the case in markets such as Denver, Las Vegas and parts of Southern California.

Denver's a particularly good example. Our franchisee there remodeled 13 Applebee's restaurants within a two-month period, experiencing a sales lift in the high single digit range, and they maximized comprehensive remodel, training and PR activities to the fullest. Applebee's located in New York City, which is our highest grossing restaurants, have also completed the new remodel and are also seeing very favorable results. A final note here. As you'd expect, we are working closely with our franchisees to ensure every remodel is as effective and cost efficient as possible.

Looking at the sale of Applebee's Company restaurants, in the fourth quarter, we successfully completed two transactions for the sale of 83 Company-operated restaurants located in Minnesota, as well as parts of Wisconsin and Virginia. In the first quarter of this year, we completed two additional transactions for the sale of 65 Company-operated restaurants located in St. Louis, parts of Illinois, and Washington, DC. The sale of one Company restaurant in the DC transaction has been delayed a few weeks, due to a lengthier lease transfer process.

The sale of Company-operated Applebee's restaurants furthers our strategic objective of transitioning Applebee's into a more highly-franchised restaurant system. We believe our more heavily-franchised business model requires less capital investment and reduces the volatility of the Company's cash flow performance. In summary, we are pleased with Applebee's performance for the fourth quarter and 2010 and confident we are focused on the right strategies to deliver against our potential this year.

Turning now to IHOP. Although domestic system-wide same-restaurant sales were flat for the year, results did increase 1.1% during the fourth quarter, making the chain's second consecutive quarter of sales growth. Despite positive traffic in October and November, quarterly sales reflected essentially flat traffic, offset by an increase in guest check. IHOP's check average was $9.90 at the end of fourth quarter, in line with our competitors.

IHOP continues to emphasize value and differentiation. Our performance for the quarter reflected the promotion of limited time offers, Trick or Treat All-You-Can-Eat Pancakes, and Festival of Flavors, which were both unique to our brand and leveraged our core breakfast equities. They were solid performers, representing more than 10% and 5% of our sales mix respectively.

IHOP also saw the continuing benefit of our new system-wide menu, which launched in September, and includes new breakfast, lunch and dinner items along with our new Simple and Fit format. Integrated throughout the menu, Simple and Fit makes it easier for guests to choose lower calorie options that taste great and meet their nutritional needs. A variety of items are under 600 calories and if you haven't already, I urge you to try them. Also now, all of the IHOP's kids items are under 600 calories.

While the breakfast day part continues to be a strong performer that accounts for more than 37% of sales, IHOP has also been successfully expanding guest awareness and sales at dinner. For the quarter, and year, the dinner day part represented approximately 19% of total sales. It also experienced traffic growth throughout 2010. We attribute this to a number of initiatives, including IHOP's popular Kids Eat Free dinner promotion that was featured in April and August. Additionally, over the past several years, we've made meaningful menu enhancements with great lunch and dinner choices for our guests. At one time, breakfast items represented more than 70% of IHOP's total sales, regardless of the time of day. Now that number's about 57%. This speaks to IHOP's success in building brand equities beyond breakfast.

Gift card sales at IHOP ended the year on a strong note with nearly $13 million in sales during the quarter, nearly $7 million of which were generated from third-party distribution relationships. This is up significantly from a little more than $3 million in third-party sales in the fourth quarter last year, thanks to the expansion of our third-party distribution network to 20,000 retail locations nationwide, and we continue to grow the program.

In terms of operational excellence, IHOP franchisees are maintaining exceptional levels. In 2010, 91% of our franchisees were rated as an A or B operator. And throughout last year, IHOP was focused on improving guest satisfaction with our new Voice Of The Guest program to enhance feedback. We've also been working on speed-of-service for faster table turns and shorter wait times. Both those priorities are a continued focus this year.

And during the quarter, franchisees developed 26 new IHOP restaurants, ending the year with a total of 64 restaurants added to the system. IHOP also reached an important milestone in November, with the opening of our 1,500th restaurant in Washington, DC. Franchisees have also completed more than 200 remodels in 2010. This week, IHOP also celebrated our sixth Annual National Pancake Day. The early indication is that the day was a great success, raising a tremendous amount of donations for Children's Miracle Network Hospitals. We'll have more details for you on our next call.

At both Applebee's and IHOP, our core operating fundamentals remain strong, and we plan to capitalize and build on this momentum throughout 2011. I'll cover our 2011 guidance in a moment. But first, let me turn the call over to our CFO, Jack Tierney, for a more detailed financial review of fourth quarter and fiscal 2010 performance.

Thank you, Julia. I would like to start today's discussion by adding to Julia's comments about our refinancing, then I will provide a review of the fourth quarter and full-year financial performance.

As I mentioned previously, 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, put in place in the fourth quarter, achieved those objectives and was accretive to EPS. On February 25th, we closed on a repricing of our term loan facility to take advantage of even lower market interest rates. Our term loan facility now bears interest at an annual rate of LIBOR plus 300 basis points, with a LIBOR floor of 125 basis points. At current market rates, this represents a 4.25% interest rate, compared to our previous 6% interest rate, a savings of 175 basis points.

On a pro forma basis, the repricing will save after-tax interest expense of $7.8 million, and improve our diluted EPS by approximately $0.44. Including the repricing, our weighted average after-tax interest rate is 4.2%, an improvement of 65 basis points from the old capital structure of securitized debt and preferred stock. As a result, pro forma after-tax savings on the new structure is approximately $12 million annually, or $0.67 per diluted share. The cost of the repricing was $12.4 million, which included a soft call premium of $7.4 million on the existing debt. We also increased our $50 million revolving credit facility to $75 million. The increase in size will provide additional flexibility in managing our cash balances. We may also use a portion of the revolver, and up to 50% of our excess cash flow to opportunistically reduce bond debt over time.

Now, turning to a discussion of our fourth quarter and full-year 2010 financial performance. I would like to remind everyone that our 2009 results were positively affected by a 53rd operating week. The estimated impact on our 2009 results was $30.2 million in revenue, $13.2 million in segment profit, $10.6 million in profit before taxes, and $0.38 per diluted share. Our fourth quarter adjusted net income available to common stockholders was $10.6 million, compared to $13 million last year. The year-on-year decline is primarily related to the 53rd operating week in 2009, and a $7.7 million charge related to the default of an IHOP franchisee. This was partially offset by higher same restaurant sales of 2.9% for Applebee's and 1.1% for IHOP, margin improvement in Applebee's Company-operated restaurants, and lower preferred stock dividends on the Series A, which was completely paid off in the fourth quarter of 2010.

As I mentioned earlier, we recorded a non-cash charge of approximately $7.7 million or $0.27 per diluted share in the fourth quarter of 2010, related to the default of an IHOP franchisee. $5.7 million of this charge relates to a lease accounting write-off recorded in our rental operations segment, and $2 million relates to bad debt expense recorded in our franchise operations segment. We believe this default was the result of the franchisees' business activities, unrelated to IHOP. All 40 of the restaurants are in the process of being sold to a large existing IHOP franchisee.

Applebee's Company-operated restaurant margin improved 210 basis points to 15.5% for the fourth quarter of 2010, versus 13.4% last year. As I have mentioned before, the fourth quarter is normally the lowest-margin quarter in the year, because of the number of holidays in the fourth quarter. However, in the fourth quarter of 2010, the net impact of higher menu prices and better product mix, partially offset by lower traffic, improved the fourth quarter margin by 160 basis points. Additionally, the impact of refranchising 83 restaurants, closing five restaurants, and restaurants held for sale improved the margin by 110 basis points. Other items impacting the margin included increases in general liability insurance, higher facility costs, and the effect of the 53rd operating week in 2009. These were partially offset by favorable timing of local advertising expenses.

For the full year, adjusted net income available to common stockholders was $61.7 million, compared to $69.7 million in 2009. This decrease was primarily due to the 53rd operating week in 2009, the charge related to the defaulting IHOP franchisee, and a higher adjusted tax rate, partially offset by lower interest expense and an increase in the number of IHOP effective restaurants. Full-year 2010 G&A expenses were $159.6 million, or $1.2 million greater than 2009, and in line with our guidance of $159 million to $161 million. Full-year 2010 interest expense declined $15 million compared to 2009, primarily as the result of debt retirement prior to the October 2010 refinancing and lower non-cash interest expense after the October 2010 refinancing.

In the year, Applebee's Company-operated restaurant margin improved 40 basis points to 14.8% for fiscal 2010, compared to 14.4% for fiscal 2009. The net impact of higher menu prices, partially offset by lower traffic, improved the full year operating margin by 60 basis points. Food and beverage costs decreased 30 basis points due to lower commodity costs, mostly driven by poultry and oil. These gains were partially offset by higher direct and occupancy cost of 50 basis points, due to increases in facility expenses, higher gift card costs, and the impact of the 53rd operating week in 2009.

We recognized a tax benefit of $9.3 million in 2010. The benefit was primarily due to the write-off of $64.2 million of deferred costs and $46.1 million in prepayment costs and tender premiums, related to the refinancing of our securitized debt. Excluding the impact of refinancing, impairment, non-cash interest and refranchising, our effective tax rate was 35.5% for fiscal 2010, compared to 31.1% last year. We have received or will receive a tax benefit of approximately $40 million from the refinancing in the fourth quarter of 2010, and the first quarter of 2011. The $7.6 million premium paid to retire our Series A perpetual preferred stock was not tax deductible.

Full-year cash flows from operating activities increased $21.4 million to $179.3 million, primarily due to lower interest payments as a result of lower debt balances and the timing of cash interest payments on the Company's bonds. This was partially offset by the impact of the 53rd operating week. At year-end, our bank debt totaled $844 million, and our outstanding bonds totaled $825 million.

In the first quarter of 2011, we reduced bank debt by an additional $102 million, and since the October 2010 refinancing, we have reduced total bank debt by $158 million. $68 million of this reduction has come from asset sales, and $90 million from our free cash flow. Total bank and bond debt now stands at $742 million in senior secured term loan facility, and $825 million in senior unsecured notes. Overall, we are very pleased with our fourth quarter and fiscal 2010 results and the successful completion of our refinancing. Now, I will turn the call back to Julia for a discussion of our 2011 guidance.

Thanks, Jack. Now, looking at our performance expectations for 2011, our outlook for the year takes into account continued economic and consumer headwinds. We believe that unemployment will remain a challenging macro factor, and continue to impact consumer confidence and their discretionary spending habits. However, offering value in relevant and differentiated ways will be a primary competitive advantage for our Applebee's and IHOP brands, as value is what those two brands stand for.

To borrow a phrase I used throughout last year, I believe our results from month-to-month and quarter-to-quarter may be lumpy and bumpy. However, on a full year basis, we believe that Applebee's will perform at a higher level, while IHOP's performance could be essentially flat compared to last year from a same-restaurant sales perspective. At DineEquity we have a fundamentally differentiated approach to brand management that centers on the powerful and strategic combination of marketing, menu, operations and remodel initiatives, that creates a unique and relevant connection with our guests. And our Shared Services operating matrix allows our brands to focus on those things that drive the business, while leveraging the resources and expertise of our scalable, centralized support center. It is truly a competitive point of difference. Together, this closely integrated approach results in differentiated brand performance that drives DineEquity's growth and delivers results for our shareholders.

While our key 2011 performance guidance was detailed in our news release this morning, let me walk you through the notable factors driving our outlook for the year starting with Applebee's. Our brand revitalization work continues into 2011, to drive the sales momentum building within the Applebee's system. Our efforts will revolve around primarily driving profitable sales and traffic by optimizing segment solutions. We expect to continue introducing new menu items throughout the year, with strong value messages featured in our national advertising.

Additional areas of opportunity include a revamped lunch program, optimizing our afternoon and off-premise offerings, and becoming a great alternative at dinner for the not-cooking-tonight crowd. Growing beverage sales, alcoholic and nonalcoholic choices, across all day parts will continue to be a priority. And, cultivating powerful one-on-one guest relationship marketing through social media is a clear opportunity as evidenced by Applebee's recently being cited as top among casual restaurants for creating online exposure impact.

We expect franchisees to remodel approximately 221 Applebee's restaurants this year, while we will move forward with approximately 54 remodeled Company-operated restaurants for a total of approximately 275 restaurants remodeled. Our approach from a Company restaurant perspective will be to focus on select markets for maximum impact. The average sales lift has been in the positive mid-single range and we are assuming a comp contribution from our remodel activities this year of about 20 basis points.

Between remodels completed last year, and those expected in 2011, we expect that 25% of the Applebee's system will reflect our remodel package by the end of the year. These factors, along with continued operational improvements, give us confidence that Applebee's will deliver domestic system-wide same restaurant sales in the range of a positive 1% to 3% for the full-year 2011. Quarter-to-date, Applebee's same restaurant sales is performing within this range for the first quarter 2011. New restaurant development will be modest, with the expectation that franchisees will open 24 to 28 Applebee's this year. In 2011, we are executing a plan to evaluate Applebee's restaurant growth potential, assess existing franchisee development capability and develop action plans to fill the gap. We'll keep you posted on our progress to define future restaurant growth potential.

Now, regarding franchising, since our acquisition of Applebee's, we have completed the sale of 258 Company-operated restaurants, in line with our strategy to transition Applebee's into a more highly-franchised system. Asset sales, along with other debt reduction activities, have enabled us to reduce total debt by nearly $513 million from the time of the acquisition to our opportunistic debt repricing completed last week. We successfully sold these restaurants through an unprecedented economic dip and credit crisis, the likes of which we have never seen. We intend to continue our strategy to opportunistically sell Company-operated Applebee's restaurants over time, and further reduce our total debt levels. As of today, we have 220 restaurants for sale, excluding 23 Company restaurants that we'll keep as a test market in Kansas City proper.

As the credit markets improve and the economy strengthens, we believe this will create more opportunities to attract buyers of our highly-valuable Company-operated Applebee's. The improving same restaurant sales and EBITDA performance at these restaurants should enhance our ability to achieve the valuations that meet our expectations and create value for our shareholders. The pace of further refranchising activities going forward will be driven by our ability to find quality franchise operators who have access to capital and a willingness to enter into transactions at values that meet our expectations. We have the financial flexibility to be as patient as we need to be, and the timing of transactions will continue to be highly variable. But make no mistake, we will achieve our long-term strategic objectives of making Applebee's into a more highly franchised system.

Turning now to IHOP. We believe we have a greater opportunity to grow our average restaurant volumes through positive traffic, building day parts and developing a robust, long-term value strategy. To that end, we'll continue our successful limited time offer strategies in unique and clearly differentiated ways. Dinner will be an important focus, building upon our success from last year. Menu evolution and optimization, with an emphasis on innovation and a strong value positioning will be an ongoing process, and we expect to increasingly connect with guests through digital and social media outlets as well as building our Guest Loyalty Program.

Operationally, IHOP will look at service initiatives to improve guest satisfaction, improve speed of service, and improve kitchen efficiencies. Our efforts in 2011 will also be complemented by additional research support that will provide a strong consumer segmentation framework with clear target prioritization to drive our efforts this year. These factors will position IHOP to deliver domestic system-wide same-store restaurant sale comps in the range of positive 1% to negative 2% in 2011. Currently, IHOP same-restaurant sales are performing outside this full-year range, trending towards the low single digit negative comp for the first two months of the first quarter of 2011. That said, we are optimistic that our plans we put in place will have a positive effect on regaining IHOP system momentum throughout the year.

From a development and remodel perspective, IHOP has a strong development pipeline that includes more than 300 committed and optioned franchise restaurants that are expected to be built over the next several years. IHOP franchisees are expected to build between 55 and 65 new restaurants this year, nearly all of which will be opened in the US. We also expect franchisees to remodel approximately 250 restaurants this year, as we continue to keep the IHOP brand fresh and relevant.

In summary, we've accomplished much, and much remains to be done. But I hope you can see why we have a great deal of confidence in the Applebee's, IHOP and Shared Services teams and believe 2011 will bring terrific results for our brands and our business.

Now for an update on our third-party purchasing cooperative. Entering 2011, as you're well aware, the commodities market continues to heat up virtually across the board. The co-op is employing numerous strategies to temper this unfavorable environment, such as forward coverage where affordable, spot purchase and storage opportunities, product and packaging rationalization, and leveraging of suppliers' capabilities to drive efficiencies and cost savings. Additionally, the co-op continues to work on distribution center consolidation, which is a very important source of savings. The co-op began with 56 DCs in early 2009, and has reduced that number to 49. The ultimate goal is to cut that number in half by the end of 2013.

Despite these steps and our consolidation savings progress since the co-op's formation in 2009, we expect commodity costs for both Applebee's and IHOP to be unfavorable this year. More than 75% of Applebee's commodity costs are protected through the first half of 2011. However, we project the brand's overall market basket will be up approximately 1.5% this year. This is primarily driven by expected increases in seafood, oil, bakery and dairy. Beef, pork and poultry costs are expected to be essentially flat.

Meanwhile, approximately 60% of IHOP's commodity costs are protected through the first half of this year. IHOP's overall market basket is projected to be up 3%-plus, this year. This is primarily driven by the mix of key items that the IHOP system uses, such as pork, egg, coffee and dairy, which are expected to be substantially higher this year. And while an unfavorable commodity environment is not optimal for our franchisees, we believe that both our brands can price with inflation, and we expect that to be the case for Company-operated Applebee's restaurants as well.

Turning to our Company restaurant performance. Applebee's Company restaurant operating margin is expected to range between 14.8% and 15.2% for 2011. Our outlook takes into account modest pricing as well as other operating initiatives that are expected to have a beneficial impact, which will be offset by an increasingly unfavorable commodity market basket throughout the year. As a reminder, typically the first quarter reflects our strongest margin performance due to a higher level of gift card redemptions while margins during the second half of the year are weaker due to reduced sales days with an increased number of holidays.

Looking at our guidance on consolidated cash from operations, our range of $125 million to $135 million is lower than our actual performance in 2010. This is primarily due to the sale of Company-operated Applebee's, the timing of cash interest payments, and tax benefits related to the write-off of deferred financing costs under our previous capital structure. Capital expenditures are increasing versus last year, primarily due to our commitment to join our franchisees in the adoption of Applebee's remodel program at Company-operated locations, as long as we own them. Consolidated free cash flow will range between $112 million and $122 million. We currently expect that our primary use of excess cash will be funding further debt reduction.

Finally, as promised, I wanted to touch upon our outlook for DineEquity's performance, once we successfully complete the sale of Applebee's Company-operated restaurants, a point in time which we term steady state. As I mentioned, the timing of the sale of restaurants can be highly variable. Therefore, we believe the best way to facilitate a discussion of our steady state performance is to provide all the information necessary for investors and analysts to utilize your own assumptions on the timing of the sales, while providing financial metrics on a per-restaurant basis, to increase the accuracy of your modeling efforts. To that end, we have posted information on our IR website that should be helpful and I encourage you to take a look.

I'll close with a final thought. Since acquiring Applebee's in November 2007, we have successfully executed against our strategic plan for the business, despite significant economic and consumer headwinds. We've completed the sale leasebacks of Company-owned real estate and sold Company-operated restaurants to franchisees, consistent with our long-term vision for DineEquity's business model. In the process, we used proceeds and free cash flow to pay off a significant amount of the considerable debt we took on to finance the Applebee's acquisition. But, we are not done. For the next couple of years, we plan to continue to focus on debt reduction.

That said, we've obviously created a Company that can and should leverage our internal expertise, and the platforms that we've created with internal functions like our Shared Services operating structure and our third party purchasing co-op. Scaling this model is absolutely something we intend to look at in the future. I fully expect there will be a time when we get the debt levels to such a point where we would once again consider acquisitions as a means of achieving greater earnings power and cash flow generation. In the meantime, we continue to be dedicated to further debt reduction with the use of our available free cash flow.

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

Thank you. (Operator Instructions). Your first question comes from the line of Chris O'Cull from SunTrust.

Thanks. Good morning.

Hi, Chris.

Hi. Julia, as you mentioned the CFO guidance for 2011 is difficult to compare to 2010 because of some of the refinancing and the refranchising activity. Could you all quantify some of the major year-over-year comparison issues?

Yes.

Sure, Jack can do that.

Just to get in -- not into a lot of details, but just talk about the structural things that changed from -- or will change from 2011 to 2010. One, as you know, we've refranchised a considerable amount of restaurants in the fourth quarter, and in the first quarter of 2011, and that will reduce EBITDA by about $35 million, and cash flow from ops by a like amount.

We also in 2010 did not pay interest on our bonds. Our bond interest is due twice a year. I think it's April and October. So we essentially deferred about $16 million of interest from 2010 to 2011.

And then also, when we refranchised restaurants, there are some trailing liabilities that we have to pay and we estimate those at about $120,000 per restaurant. And if you kind of ballpark that, maybe $10 million to $12 million in 2011. Those are structural things that will change on our cash flow from operations between 2011 and 2010. Is that helpful?

That's very helpful. I appreciate that. Does the guidance take into account -- the CFO guidance, does that take into account the tax benefit related to the refinancing charge?

It does. It does. As I mentioned, we have approximately a $40 million charge. Some of that we got in the fourth quarter and some we'll get in the first quarter.

What was the amount in the fourth?

I don't have it with me right now, but I would say it's probably around $17 million in the fourth, and the balance will come in the first.

Okay.

In the first.

And then I really appreciate the steady state presentation you guys provided and hopefully I didn't miss the answer to this question from the deck. But what is the amount of the annual rent expense that would be removed if you were able to transfer the leases of those 86 stores that were included in the [big] transaction?

You know what, Chris? We may have to get back to you with that. I mean, obviously the guidance has the $1.6 million per -- or $1.7 million per restaurant. But we didn't break it down into an annual basis.

I think the steady state said $280,000 per unit would be the reduction when you refranchise, but that does not include the removal of the $50,000 per unit in CapEx, the rent expense reduction, or the payment of debt and the removal of interest expense; right?

That's right.

So that would bring that number down quite a bit then.

Yes.

Okay. Thanks, guys.

All right. Thanks, Chris.

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

Good morning. Actually, just a quick follow-up there to Chris' last question. So this $280,000 on page five of the supplemental you provided --

Right.

The question just moments ago was it does not include rent expense but we're starting with a GAAP restaurant operating profit. That would be after operating rent expense. It just doesn't include the sale lease-back rent expense; correct?

That's right. Thanks for that clarification.

I guess I wanted to get into just a little more drill-down and understanding of the results quarter-to-date at IHOP. Certainly the largest competitor from whom you've taken massive market share of over the last decade is aggressively value promoting on TV right now. Would you attribute some of the softness at IHOP currently to that marketing program?

You know me. I'm big on holding ourselves accountable for things we could do better and I'm pretty focused on what I think we can do better and I think as I said, two things. One, we're doing some -- again, let's put this in perspective. It's one quarter of softness. I don't want to be over-zealous. Two months doesn't make or break. We're being very forthright here. I do think all of us would say that the All-You-Can-Eat Pancakes promotion we did in January and most of February, I don't think that really resonated with guests and that's the work that we're doing with some of the additional consumer research to get at vis-a-vis our different segments on a go-forward basis what's important and what resonates.

Clearly, we're doing a lot of things right in-store but I think we want to do some additional research to get at what really resonates with our guests. But right now, today, as you recall, this past Monday, we started a new promotion. I think we're looking to that promotion to give us some additional insights. But remember, it is a tale of two halves. The latter part of the second half of 2009, IHOP did quite well, and continued to steal market share. I just think it's this last couple of months that's really got us reflecting on how can we be even better on a go-forward basis.

I haven't had time to watch TV in the last few days. Could you describe a little bit what the new promotion is?

Okay. It's waffles and chicken which is a little bit of breakfast and a little bit of dinner combined. It's a great opportunity for people to experience the dinner day part and the breakfast day part all at once and in one item. We've got to get you to an IHOP.

All right. Thank you very much.

All right. Thanks.

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

Thank you. Jack, I just want to follow up on a couple of things you mentioned. I think you mentioned around $100 million of debt reduction in the first quarter to date, and I'm just trying to get a sense of, was that kind of a combination of the proceeds from the transactions that may have closed in the first quarter, as well as the existing cash balance and could you kind of give me some sense of is it about half and half or, can you give just, some additional color would help.

Hang on a minute. Let me just see what I can do there. So part of it is obviously coming from the cash flow and the favorable taxes that we got from the refinancing. I don't have the exact number of that split out of $100 million, but the DC piece would have been about $30 million. And we're looking at it right here. And so it looked to me like -- you know, we may to follow up, but it looks like it's about $35 million to $40 million from asset sales, and the balance is free cash flow.

Okay. And on the repricing of the debt, I thought you maybe mentioned, you freed up of some flexibility that would allow you to opportunistically repurchase notes. I just wonder if you could clarify maybe how quickly you could actually use free cash flow to repurchase the notes, as opposed to just paying down the credit facility.

We could do that now. I mean, it's all going to come down to what's a better use of our cash. And so opportunistically, we're going to look at the notes and if they make sense, we're going to -- we'll probably buy some. We do have to amortize the bank debt using 50% of our excess cash flow. But we can use the other 50% for buying notes.

Got you. Thank you.

Your next question comes from the line of Reza Vahabzadeh ,

Good morning.

Good morning.

On the supply chain savings that you talked about, are those savings quantifiable and are they accelerating as you get deeper into that program in 2011 or are they basically steady state, same amount of savings, the next couple of years?

Yes, we've said over the longer term we expect 3% to 5% savings out of the co-op and I think they're well on their way to doing that and they quantify that for their members once a month on each of the brands. But what we did is we tried to give you an overview of -- because we've had so many questions for this year, kind of where we are, but we don't get into the specific savings either by category or item, because it's really apples and oranges that you're providing, sort of on a year-over-year. So we thought just an overview would give a good sense for now kind of where they are and where they're going.

And again, I think the franchisees are very pleased with their membership and their results and their board perspective. But it's really hard to do that from a starting point, what are you comparing against, so I think the overview is probably worthy. And again, I think my comments about the distribution centers is critical. I mean, it's not just about the SKUs. We do need to get our franchisees to consolidate distribution centers and that's a really big full court press for both brands this year and for the co-op.

Right. And then as far as Company-operated margin comparisons year-over-year, without getting into too much exhausting detail, would you generally face easier year-over-year comparisons in the first half of 2011 than the second half, just based on your forward programs and where the program is standing today versus last year?

A little bit. I don't know if it would be extreme. I think it's -- yes, we're all kind of -- it's a little, but I don't know how large that is when you take into account -- we didn't talk a lot about this today, but the number of new menus we're putting in and the advertising, holidays, I mean, when you take it all into account, I don't know if I could say it was substantive, Reza.

Right.Can you give us a flavor perhaps for the tone of pricing and competition and promotional activity in casual dining right now.

Great question. So I'll answer the first part or the last part first. Which is I do believe there continues to be discounting and promotion, and I said this before. There are very few large chains in America that are in casual dining, but there's lots of independent operators, and there's lots of regional smaller players, and I think all of them to compete are in this promotional discounting and couponing.

I think what makes us uniquely different is what I've said a multitude of times which is this notion of really providing value and taking our products and value engineering them and as you walk into a restaurant, providing all that added value, whether it's the remodel, whether it's the service platform. It's all the things that we're doing in combination. But I do think there is still a fair amount of promotion and discounting. I think as I said in my prepared remarks, we feel very strongly that from our research and our discussions with franchisees and certainly what we know today, that both brands can price with inflation this year quite comfortably and we feel good about that. I mean, clearly that's not the only thing that we have in our quiver but it's certainly an important aspect. Got it. And Jack, one last question. The system store growth that you've detailed in our outlook, will those new stores come online relatively evenly by quarter or will they be more accelerated in second half versus first half?

It's the latter. It's more second half versus first half.

Just to refresh your memory, all of those restaurants in 2011 will not go into the comp calculation. At Applebee's and IHOP, they don't go in a comparative sales compilation until they've been physically open 18 months. That's our standard operating procedure. So all those new restaurants at high volumes do not get counted into the comp growth number.

Thank you much.

Your next question comes from the line of Michael Wolleben, Sidoti & Company.

Thank you. I was wondering if you could just go back and circle back to the Applebee's performance here, the difference in traffic trends that you saw between Company and franchise. What was kind of driving that? Is there opportunities for those Company units to start to come back up to positive traffic here in 2011?

I think that's a fair question. I think there's a lot of things driving that. Clearly, our Company restaurants, as you know, are all fairly far east of the Mississippi and so with that comes weather-related. But more importantly, I think there's a real focus in 2011 on some of the key success factors that franchisees have done so well, whether it's really focused on late night, or it's really the execution of the lunch programs. Many of the items that the franchisees have taken on in a very bullish way, I think we need to do the same at the Company-operated and that's been our real focus. It's a wonderful compliment to our franchisees who do so well and create some of these programs that we have an opportunity to embrace them as well. So I think that's really the focus for 2011, is to get us to adopt some of these programs as aggressively as the franchisees have done.

Okay. And then on the -- I appreciate the steady state commentary on that slide deck but given that information out here, are you guys seeing an improved credit environment? Are you guys seeing increased interest out there for the remaining units? Is there -- is it a better environment today than it was six months ago in trying to move these off your books?

Yes, I don't know if there's a lot of difference. Jack can certainly comment on the conversations he's had with banks. We've always had a fairly substantial interest. I think I've said before, robust interest in the individual markets. It's always about getting a franchisee with the right interest and the right valuation and the right capabilities and putting all that together. I don't know, do you want to comment on the banking?

I would just say, it's hard to see a difference in six months, a material difference in six months. Clearly, though, there's been a significant difference over two years. But in the last six months, I don't notice that there was a significant difference. And it's really to Julia's point, it's more about the franchisee and the partners that we want to partner with, than it is about the capability of getting financing.

Okay. Thank you.

Thank you.

Your next question comes from the line of Jack Wagner of MJX Asset Management.

Thank you. When you spoke about your locking in the cost for IHOP for the first half of 2011, what was the percentage that you mentioned?

I don't think I mentioned a percentage. I'm sorry, yes. 60%.

60%.

Of IHOP's commodity costs are protected through the first half of this year.

Also, can you talk a little bit about the relationship with the franchisees, whether it's both remodels and menu pricing, do they have to go along with -- if you suggest that their store needs to be remodeled and do they have to go along with any of the pricing on the menu?

Two different things.

What they have to do --

I'm sorry, go ahead.

Can you address what they need to do, or do they have the flexibility of basically saying no?

Okay. So let me answer the first part of the question. On the remodel, in both Applebee's and IHOP, it's in their franchise agreement, they're contractually obligated every six years at Applebee's, they're contractually obligated to remodel, and every five years at IHOP. Now because of the way we manage and lead, we care more about our relationship with the franchisees than we do the actual franchise agreement. So we've worked very hard at both brands to include them every step of the way in the development of the remodel, how it can be relevant and how we can take cost out of it, and in both brands, I think we've done a stellar job of working with the franchise community to take out any extra costs and make certain that everything we do in the remodel has an impact to the customer, both on the exterior and the interior.

And so both those programs have progressed quite nicely. In fact, we're on our second full range since I've been here, working with IHOP. So this is the second full evolution of the remodel. And so that's gone well.

On the pricing side of it, the law's very clear in the United States. You cannot price-fix with franchisees. And so it doesn't matter whether it's Applebee's or McDonald's, you can't tell franchisees what to price. Quite the contrary. What you can do is offer counsel, you can do price elasticity studies, you can tell them the differences across the United States, you can give them ranges of what consumers would say would be too expensive or too inexpensive, but they absolutely have the right to price how they want, and I think I give my compliments on both sides of the brand that they've worked hard, because it is both an art and a science to pricing. They've done a nice job of trying to keep in that range.

We certainly give them coaching and counsel. We tell them what we're doing in our Company-operated restaurants. That's really good for us from a testing perspective, what represents low, medium, and high, but they have the right to absolutely price how they wish.

Thank you very much.

Your next question comes from the line of Will Slaughter of Stephens.

Good morning. Thanks for taking my questions. On the uptick in Applebee's operating margins for the quarter, I wonder if you could give us some more specifics around the offerings there that gave you the mix lift and also some color around the labor benefit that you mentioned in your release, and if you think that benefit is sustainable going forward.

Why don't I answer the second part, which is I do believe that the labor savings they've got in place is sustainable. That's that long-term project they've put into place at Company-operated restaurants to ensure that they're sort of getting the maximum benefit when it's not busy and the maximum benefit when it is. I feel pretty comfortable it's sustainable. You want to answer the first part?

You'll see this in our K, and actually it was in the release. Essentially, we took pricing up in the quarter 2.1%. And that's not on any individual item. That may be on more across the board, kind of. And then the product mix, pasta I think was introduced in September. That significantly helped the mix as well. It's also some suggestive selling, where we're also selling desserts and beverage that is also improving that mix.

And then on the bounceback gift card offer you guys brought in during the quarter, wonder if you could talk about the economics there, if they continue to make sense for you, to maybe bring that back down the road and also you talked last quarter about how you expected redemption activity to pick up in 1Q, if you've seen that to date.

Yes, I think what I talked about was that the industry does a fair amount of couponing and discounting. I don't think it's certainly our intention to do a fair amount of discounting and we don't really comment on the first quarter 2011. We don't do inter-quarter. But I think at the end of first quarter 2011, we can give you an update on where we are. But we aren't necessarily doing a lot of discounting and couponing. Our focus is really on adding value but from time to time there may be a free-standing insert or a coupon.

Right. I was referring to the gift cards for 4Q.

Oh, gift cards.

Right.

I'm sorry. Ask the question again.

For the gift cards where you're offering $10 off if you bought $50.

Right.

I was saying you mentioned last quarter that you expected that to affect redemptions in 1Q. Wondering if that activity had picked up as you expected.

Yes, we haven't guided on that for first quarter. It definitely works from time to time.

Okay. Great. Just lastly, a housekeeping question. Don't know if you break this out or not but wondering if you could talk about the moves in average check and traffic during the quarter for both comps of Applebee's and IHOP.

Yes, we don't ever break that out for either of the brands. I mean, we'll give you general comments about check and about traffic but we don't go into specifics. I think that the check for both brands I think we gave you an overall for where we were in 2010, which is highly competitive.

Okay. Great. Thank you.

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

Hi, good morning.

Good morning.

My question is on the Applebee's brand. You've talked about alcoholic beverage, bar business being a significant opportunity for you. I was wondering if you could give us some metrics on whether you continue to see good momentum in growing that business in Q4, where that is as a percentage of sales at the end of the year, and where do you think it can ultimately get to. Thank you.

Well, it's hard to say where it would ultimately get to. TGIF has over 20% alcoholic mix as a percentage of their sales. They're a smaller competitor of ours, so not certain we're ever going to be at 20%, but we started out at 11% and 12%, which was some of the lowest in casual dining so we know we certainly have an opportunity, and I think the fact that we are now at 14% as a percent -- I'm sorry, we started at 12%, plus or minus, with an alcoholic mix, and we're now at 14%, which is the highest it's ever been, ever, at Applebee's. We certainly have an opportunity to get higher. I don't think we've ever shared our target, necessarily, but for the year, we definitely saw an increase, and I think some of what I mentioned earlier that we're continuing to do at late night and even at the day parts provides that opportunity.

Okay. Great. Thank you.

Your next question comes from the line of Carla Casella, JPMorgan.

Hi. Most of my questions have been answered. Can you just talk about competitive openings and what you're seeing, if it's any more difficult in one part of the country versus another?

Are you talking about Applebee's or IHOP?

Actually, both.

Yes, I mean, in general terms, virtually none of our competitors are developing. I know of no major development going on in the industry, other than Denny's purchased some Flying Js. I don't know of any major development going on across the country in either brand. We're definitely leading with IHOP's development and the small development that we're doing in casual dining is probably still better than anybody else.

Okay. Great. Thank you.

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

Good morning, guys. Julia, I think you mentioned from an M&A standpoint you obviously want to spend the next couple years kind of reducing debt. Is looking at other opportunities more a function of kind of selling off the balance of the Company [besides] Kansas City, or is it more based on a leveraged target before you would lever back up to buy something.

Actually, it's neither. I think what I said was we have this unique opportunity here, one plus one, definitely equaled three. With the purchases of Applebee's, we now have a complete infrastructure of shared service model, the co-op. We really have this scalable opportunity here, so down the road, all I was saying is with the scalable opportunity you can obviously look at that. But you picked up on my comment exactly right, which is right now, for the next couple years we're clearly focused on debt reduction.

Okay. Thank you.

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

Hey. Just wanted to get a little more color on the term that Julia used twice, so it's fair game. Pricing to inflation. What exactly -- can you give a little more color on what you mean by that? Pricing to the dollar inflation? Pricing to hold food cost? Help flesh that out a little bit.

Sure. And it is fair game. I think in general, what franchisees would tell you is if they looked at their P&L and they see that costs are going up, they are most likely going to price to either meet that or cover for it, and the good news is, we feel confident in both brands, that is not a doom and gloom but rather it's capable, given our elasticity and where we sit from brand cachet, we're pretty comfortable that franchisees pricing to cover those increases, we're going to be just fine.

Okay. That's based on a lot of the research work and stuff you've been doing on an ongoing basis?

Research work, as well as going backwards over the last 10 years and looking at that capability. So as our brands have both gained more cachet and capability and differentiated themselves, we do see that difference between the cost and where they fly as being a range of capability, and that's the work that we've done sort of looking backwards and looking forwards, and that's what gives us comfort that we've done that, but we've done it in a pretty small but meaningful way, and I guess what we're saying is everything we've seen in the past, and where we see our brands positioned, gives us that comfort. If our brands were not visioned or viewed as differentiated or didn't have cachet, I think it would be very difficult. But given what other research we do about our brands, and how they're differentiated, that's what gives us comfort. It's the combination of really both, Bryan.

Great. Thanks much.

You're welcome.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to Ms. Julia Stewart.

I would like to say thank you. As always if you have any additional comments, I want you to feel free to call us here at the office, either Jack or myself or any of the team. Our next reporting date will be May 3, 2011. At that time we'll give first quarter 2011. Okay. Take care.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.