Dine Brands Global Inc (DIN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 DineEquity's earnings conference call. My name is Brian, and I will be your operator for today. At this time, all attendee lines are muted, and in a listen-only mode, and we will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes.

(Operator Instructions).

I would like to now introduce to you, Mr. Greg Kalvin, DineEquity's Corporate Controller. Please proceed, Mr. Kalvin.

Good morning, and thank you for participating on DineEquity's second quarter 2011 investor conference call. Today I'm joined by Julia Stewart, Chairman and CEO, and Jack Tierney, CFO. 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 than those expressed or implied in such statements.

We caution to you evaluate such forward-looking information in the context of these factors which are detailed in today's news release, as well as in our most recent 10-Q filing with the Securities and Exchange Commission. 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. Additionally, on this call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news release today, and are also available on DineEquity's IR website. With that, I'll turn the call over to Julia Stewart, Chairman and CEO.

Thank you, Greg, and good morning, everyone. Today I'll cover the highlights of the second quarter and update you on both brands, and before I turn it over to Jack for a detailed review of the numbers. We are pleased with DineEquity's performance in the first half of the year. In an uneven economy and a highly competitive environment, we've stayed focused on our strategic goals and operating priorities, generated good cash flow, and delivered solid financial results.

In the first 6 months of 2011, we have further reduced our debt, made additional progress refranchising company-operated restaurants, executed a lease termination agreement for our Lenexa facility, announced IHOP's first major expansion outside North America, and gained meaningful momentum in revitalizing Applebee's. I'm going get into more details about each brand, but let me say at the outset, that clearly we are disappointed with the quarter's performance at IHOP. There is more that can and will be done to optimize our menu, improve restaurant operations, and deliver the right everyday value offerings that I believe are the keys to restoring growth at IHOP. While we're not satisfied, we have a plan that we believe will get IHOP back on track. I'll talk more about those plans in a minute.

But first, let's begin with a look at the second quarter for Applebee's. Applebee's domestic system-wide same-restaurant sales increased 3.1% for the quarter, and 3.5% year-to-date. Normalized for the Easter week, which has a negative impact on Applebee's, same-restaurant sales growth in the second quarter was consistent with what we've seen year-to-date. Applebee's has now led the competitive set for 13 consecutive months, the longest such streak for the Applebee's brand since 2004.

We've been actively working on our day part strategy, by focusing on each day part, and each target segment and we're making very good progress. We're using different media strategies in each day part, including social media to successfully reach our target segments. This day part strategy is working, and we're sticking to it. You may recall that we adopted our 2 for $20 offer, as a permanent menu staple 2 years ago. 2 for 20 is a powerful value message that consistently resonates with guests, especially as we refresh with it different menu items. Value and variety are a powerful combination, and you should expect to see more of it from us at Applebee's.

Year-to-date, we also made good progress against all of our revitalization efforts for Applebee's. Now as a reminder, these revitalization strategies include menu enhancements, a focus on value, improved marketing and advertising, better training and execution aimed at delivering a great guest experience, as well as the physical remodeling of restaurants. In the second quarter, we completed another 112 restaurant remodels. This brings the total number of remodels year-to-date to 155, and 286 since the beginning of 2010. These restaurants, both franchised & company-operated, are outperforming the rest of the system, as guests respond to the changes we're making both inside and outside the restaurant. All of our revitalization efforts at Applebee's are yielding positive results, and they continue to be work in progress. We believe we're in the 6th or 7th inning, so we're not finished, but we are quite pleased with what we've seen so far.

Moving on now to refranchising. We continue to have interest in the remaining company-operated restaurants. In the second quarter, we entered into an asset purchase agreement, or an APA, for the sale of another 66 company-operated restaurants in New England. The transaction is expected to close before the end of the year. As we continue on a path towards a more highly franchised Applebee's system, we remain selective in the transactions we enter into. We work hard to ensure, a prospective franchisee shares our vision for a revitalized Applebee's brand, and that they are willing to reinvest in the business. We also insist that they possess a proven operating capability. And when we find quality franchise operators who agree to valuations that meet our expectations, only then will we move forward with the sale of company-operated restaurants. We have the financial flexibility to be patient.

Turning now to development, we recently made an announcement that we intend to expand our brand into Egypt, where we will develop 10 new restaurants, our first in the country. Applebee's is a well-known brand in the Middle East, and the region is very important to our international strategy for the brand. We're excited about this latest development deal, and believe that Applebee's will resonate with guests in the large Egyptian market.

In summary, I'm quite pleased with the results at Applebee's. Performance continues to lead the competitive set. All of our revitalization strategies are in full swing and delivering good results. Remodels are continuing at a pace ahead of our expectations, and we're steadily progressing towards a goal of a more fully franchised system. The entire Applebee's team, including the franchise community, is doing a great job, and I'm proud of them and the results they're producing.

Moving on to IHOP. As you've seen from the press release, domestic system-wide same-restaurant sales were down 2.9% during the quarter. We are clearly not satisfied with these results, and will not rest until we return same-restaurant to same-restaurant sales growth, growth you've come to expect from IHOP. The team at IHOP is very focused on both near-term and longer-term initiatives to improve performance. It is our intent to drive improvements quickly in the back half of this year, and then to keep that momentum going.

Now for competitive reasons, I'm not going to get into too much detail on our playbook for accomplishing this, but some of the measures we are taking include improving operations, reenergizing the brand with among other things, more effective marketing, refocusing on value, and enhancing our menu offerings. On operations, we're changing in-restaurant procedures to improve order time and check delivery. Now during peak periods, expedited service and table turns can have a meaningful impact on the number of guests we're able to serve. Other operational changes you'll see from IHOP, include improved staff engagement, and more focus on training and facilities management.

We know from our research that IHOP remains a very powerful brand, but we also have the opportunity to enhance our marketing, and immediately reengage the consumer with better media strategies and new advertising. We recently launched the new IHOP advertising campaign, Make it an IHOP day. And although, Come Hungry, Leave Happy, has served us well for over 8 years, research indicated that it was not having the impact we were looking for. With a new look and feel to the food photography, and optimistic pay-it-forward tone, Make it an IHOP Day, delivers a fresh message.

In addition to the recent adjustments we've made in our media strategies and advertising, we've also appointed a new marketing chief at IHOP. I'm optimistic our team will make sure the IHOP brand promise resonates with guests across the system.

Our research has also indicated that our guests want us to focus more on value, and so we're dialing up our efforts there as well. Our popular Kids Eat Free promotion, for example, which launched just yesterday, will help mom and dad deal with the budget challenges of back-to-school. You are going to see more of these value messages in the future from IHOP. While we are concentrated on successfully regaining momentum in the near-term at IHOP, we also have longer term initiatives underway to get us back on track towards a goal of building an insurmountable lead in family dining.

With the benefit of our recently completed research, we have a bull's eye on our core segment, as well as what they're expecting from us. As a result, we'll be able to better target the guests most likely give us business, more often. We're going use this knowledge to revitalize IHOP in a way that's more relevant to each of our target segments. We're also moving swiftly on an updated culinary strategy that will drive innovation on our menu, and leave meaningful item enhancements. Again, I won't get into too much detail on this public call, but I think you'll be excited from what you will see from us down the road.

In summary, while we are less than pleased with the recent performance at IHOP, we've identified the issues we need to address, and have actionable plans in place to return to growth. It is these plans which give us the confidence to reiterate our expectations for IHOP for the year, although as we said in the press release this morning, we will likely come in at the low end of our previously stated range for IHOP. Importantly, we have the IHOP system including the franchise community, aligned around the plans we have now put in place.

The team currently has a laser-like focus on the core IHOP business, and the issues I've just discussed. Amidst this backdrop, franchisees have developed new restaurants at an industry-leading rate, demonstrating further confidence in the brand. This was most recently illustrated in June, when we entered a significant new international development deal with a 9-country 40 restaurant plan for IHOP in the Middle East. The agreement marks the first major expansion of the IHOP chain outside of North America, and represents the largest international development deal in IHOP's history.

Before I ask Jack to walk you through a detailed review of the numbers, I want to say that I believe we have the right plans in place to both build on the momentum we have at Applebee's, and also return IHOP to a sustained period of sales growth. Based on these plans, we are confident we can deliver on our 2011 outlook. We are committed to our proven revitalization strategies at Applebee's, and are adjusting our approach in a number of areas to reinvigorate IHOP. We've accomplished a great deal, and yet much remains to be done at both brands. And with that, let me turn the call over to Jack, so he can review the quarter for you in more detail.

Thank you, Julia. I would like to start today's discussion by reviewing our total debt. Then I will supplement Julia's comments about the lease termination agreement on the Applebee's restaurant support center in Lenexa, and provide a review of the second quarter financial performance. In the first half of this year, we reduced total debt by $189.4 million. We reduced bank debt by $110 million, repurchased $39.8 million of our Senior notes, and reduced financing and capital lease obligations by $39.6 million. Of the $189.4 million in total debt reductions in the first 6 months, $85.1 million was from refranchising transactions, $97.3 million was from cash on hand and free cash flow, and $7 million was from amortization of financing and capital lease obligations.

In the second quarter, we bought back $7.5 million of our Senior notes. And as of June 30, 2011, our Senior bank debt totaled $734 million, and our outstanding bonds totaled $785.3 million. As we discussed on the first quarter call, we signed a lease termination agreement on the Applebee's restaurants support center in Lenexa, and we expect to exit this facility at the end of the third quarter. In the second quarter, we recorded a $21 million pre-tax charge, or $13 million after-tax related to this termination. Under the terms of this agreement, the cash lease termination fee will be paid in the fourth quarter of this year.

Now turning to a discussion of our second quarter 2011 financial performance. Our second quarter adjusted net income available to common stockholders was $16.6 million, compared to $15.7 million last year. Items contributing to this $800,000 increase include the elimination of the Series A preferred stock in October 2010, and lower cash interest expense, partially offset by the impact of the sale of 148 restaurants over the last 3 quarters and a higher tax rate.

Our non-GAAP effective tax rate was 42.3% in the second quarter, compared to our expected full-year rate of 36%. The higher rate was due to the timing of the discrete quarterly state tax charges, and impacted our diluted EPS by $0.10. Without the higher tax rate, our adjusted diluted EPS would have been $1.00 for the second quarter. For the 6 months ended June 30, 2011, adjusted net income available to common stockholders was $42.7 million, compared to $34.4 million last year. This year-over-year increase of $8.2 million was primarily due to the elimination of the Series A preferred stock in October 2010, a lower tax rate, and lower cash interest expense, offset by the net impact of the sale of company-operated restaurants on segment profit.

For the second quarter of 2011 versus 2010, Applebee's company-operated restaurant sales declined $76.2 million, primarily due to the refranchising of 148 company-operated restaurants in the last 3 quarters, and the closure of 7 restaurants in 2010, partially offset by an increase in company same-restaurant sales of 0.7%. Applebee's company-operated restaurant margin was 13.4% in the second quarter of 2011, compared to 14.1% for the second quarter of 2010. This decrease was primarily due to increasing commodity costs and higher staffing levels, partially offset by a 1.8% price increase, and a refranchising of lower margin restaurants, and closures.

Applebee's company-operated restaurant margin was 14.5% for the first 6 months, versus 14.4% for the comparable period in 2010. Variances in the 6-month period are in line with the second quarter variances, with refranchising and a price increase improving the margin, and higher commodities and labor offsetting these favorable items. Second quarter 2011 G&A expenses were $38.5 million, versus $37 million last year. We expect full-year G&A to be in line with our guidance of $157 million to $160 million, with a slightly lighter 6 month amount being attributable to timing.

Second quarter 2011 interest expense declined $10.8 million, primarily due to lower noncash interest expense from our refinancing and lower debt levels. The average debt balance during the first 6 months of 2011 was $150 million less than the same period last year. On a GAAP basis, the tax rate for the 6 months ended June 30, 2011 was 30.1%, compared to 35.3% last year. The year-over-year decline is primarily due to a favorable IRS ruling on the handling of gift cards, partially offset by the timing of discrete state tax items paid in the second quarter.

Cash flow from operating activities totaled $48.2 million for the 6 months ended June 30, 2011, versus $50.3 million for the comparable period of 2010. The small decline was primarily due to lower profit, as the result of refranchising 148 Applebee's company-operated restaurants, working capital payments due to refranchising, and lower gift card liabilities. These items were offset by an income tax refund, as the result of last year's refinancing and lower cash interest payments. In summary, we are very pleased with our strong and stable cash flow, our future ability to delever the balance sheet, and the sale of Applebee's company-operated restaurants announced this year.

Now. I will turn the call back to Julia.

Thanks, Jack. And before we go to your questions, I wanted to say few words about some of the progress we've been making at the DineEquity level. As we have integrated these 2 brands, we have established a highly efficient shared services platform, that has enabled significant reductions in G&A since the acquisition of Applebee's, and which can be scaled to take advantage of future opportunities. We are building our talent capabilities across the corporation, in order to deliver impactful results today, while positioning us well for the future.

This leadership development model is being institutionalized across the Company, as we establish an integrated culture of accountability and performance. In addition, we've made tremendous progress on our strategic priorities. We're using our strong free cash flow to pay down debt, and strengthen our balance sheet. We continue to refranchise company-owned restaurants, and most importantly, we have turned around Applebee's. These are the priorities we established following the acquisition, and I'm very proud of what we've accomplished in these and other areas, during what has been a very challenging environment.

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

(Operator Instructions).

And your first question comes from the line of Chris O'Cull of SunTrust. Please proceed.

Thank you, and good morning. My first question relates to the guidance. Julia, the guidance assumes an acceleration in IHOP's comps, and an improvement in the Applebee's margin performance. So with tougher comparisons the remaining two quarters, what gives you confidence that you can meet that guidance? (No audio - technical difficulties).

Ladies and gentlemen, please stand by. It appears that we have lost the speaker line at this time. Once again, please hold for just a moment while we reconnect the speakers to your call. We do apologize for the inconvenience. Ladies and gentlemen, we have connected the speaker's line. Mr. O'Cull, if you wouldn't mind restating your question, please?

Sure. Good morning. Can you hear me?

Yes, I can. Thanks, Chris.

My question really relates to guidance, and specifically the IHOP comp assumption, and the improvement in the Applebee's margin in the back half of the year. It looks like comparisons for both of those areas get a little tougher. I'm just trying to read -- just trying to understand what gives you confidence that you will be able to achieve that guidance?

So let me address the IHOP sales first. And I'll let Jack address the operating margins for Applebee's. So on the IHOP side, you have to give it context. In the last nine years, we've doubled market share, improved our average unit restaurant volume by almost 40%. We have been number one in family dining since 2006, we've driven the market category. We have a lot of comfort in the brand. It's done extremely well. Yes, we've had this decline in sales, but as I've said in the call today, we've completed the research. I wish we had done it sooner, but we got the research back. We know clearly what we need to do. We've got that plan in place, and we're beginning to execute against that plan. That's what gives us that comfort.

And in terms of the margin, Chris, part of the issue with the margin in the second quarter is, we invested a lot of training for late-night and lunch. And most of these costs are behind us now. So we'll have that as a favorability, in both Q3 and Q4.

Can you talk, can you quantify the impact of the greater staffing levels had on margin? And maybe also, it sounded like commodities was a factor in quarter. I thought you had about 80% of the commodities hedged. So what items surprised you?

You know what -- commodities continue to increase throughout the year, and at this point we think they have peaked, but most of it was in fresh produce, beef. I think they were the items that drove commodities higher for us in the quarter. In terms of quantifying that, commodities were probably up about 70 basis points over the same period last year.

And then the staffing levels, the greater staffing level?

That was probably a like amount, maybe a little bit higher, a touch higher.

Okay. And then, Julia, just in terms of IHOP, could you provide a little bit more color on the operational issues? I appreciate the comments about the value, but I'm just trying to get my arms around the operational issues, and whether you saw any change in the guest satisfaction levels at the brand?

So there is two things you should really think about. When we got the research back, at basically the end of first quarter, there was some very specific things that they talked about, in terms of whether it was the wait time, or how long it took to pay the check, or some very specific things we can do to fix it. And one of the other things that we got out of it, that I mentioned in the script was less about research, and just identifying the fact that we had made change in our media strategy, day 1, 2011. And we determined through the first quarter that that media strategy really isn't working.

And so part of our change that we have made immediately, like literally in the last week, is going back to the media strategy that we used to have in play. So if you add it all up, new advertising that just launched, the media strategy that got changed literally within the last week, the menu work we're working on as we speak, the value message we're putting into play, the improvement on the operating capabilities, all of those things combined that we are focused on, give us the confidence of keeping the guidance.

Okay, great. Thanks.

And your next question comes from the line of Brian Vaccaro of Raymond James. Please proceed.

Hi, I guess, that's me, Bryan Elliott. Sorry, didn't know if he -- that's right, we pre-registered. So a couple questions. One, I guess, one, back to quickly Jack on the Applebee's margin, commentary of a moment ago. So just to be clear, the 70 plus BPs you identified as staffing levels, that was mainly the training for lunch and late night, and that is now behind us, correct?

Yes, most of that is behind us, correct.

Okay. And then, Julia, I guess on the Applebee's, I appreciate certainly the sensitivity on details for competitive purposes, but -- and you obviously have been working hard on that. But I guess, I'm a little confused. I didn't realize there was a substantive, strategic change in advertising that took place in January. So if you could maybe elaborate a bit on that. And then secondly, I guess, is there anything -- did you -- are there some things like on the menu, or the value message, or some of the other things that you have listed here and talked about, that maybe where we're tested in a market or a region or something that you could point to some specific benefit that you saw in a test, for example?

So, Bryan, you said Applebee's, but I think --

I meant IHOP, yes, thank you. I'm still a little confused that I'm not Brian Vaccaro, sorry. (Laughter).

So as it relates to IHOP, the way you should really think about this is we have X amount of money that comes from the franchisee. We are the steward of those dollars, from a media perspective. We never share publicly how we choose to spend those media dollars, because it's highly competitive. So with the support of the franchisees at the beginning of the year, we made a change to where we put some of those dollars. Right?

And we have determined that changing that media strategy was not effective. So beginning immediately, we are going back to the older strategy of prior years, and putting that dollar volume, if you will, back to a place in the media strategy. So that's the way you should think about it. We would never say that, because it's highly competitive. So the dollars haven't changed. It's just where we put them. And we are, as I said, immediately going back to the strategy that we had in play, certainly for last year and years before. So that's the media piece of it. If that helps.

Yes. Very helpful.

And then from a value perspective, this is less about -- there was some promo we tested in Los Angeles, and it was successful. This is more what clearly came out of the consumer research is they want more value from IHOP, not less. And so we have an opportunity on a go-forward basis, either on what we put on television, or what we have in the menu, or maybe calling out special items to really focus on value in a more meaningful way, so people connect IHOP with value. We've got it. We probably haven't made as big a deal of it, as we should.

And that's a real opportunity for us, because it really does have -- remember, it's a check that's under $10. We're competitively placed in the marketplace with our competitors, but we have an opportunity to talk more about value. It's not just about price point, it's what you get for that price. And we think we can do a much better job on a go-forward basis, of talking the about that value messaging, both locally, on television, and frankly, even in the menu itself. So when I say look forward to things to come, that's thinking about a redesigned menu. That's thinking about a different way of talking about the brand, both locally and nationally.

Great, very helpful. Thank you.

Yes.

And your next question comes from the line of Reza Vahabzadeh from Barclays Capital. Please proceed.

Good morning.

Good morning, Reza.

On the Applebee's same-store sales, obviously, you're rolling over more difficult comparisons. How should we think about Applebee's same-store sales as you move through the second half? And I obviously noticed your guidance for the year, but does that mean that second half same-store sales will be lower than first half?

Yes, the way you should think about it is, after first quarter, we revised guidance up, as you recall at Applebee's.

Right.

We took it to the 2% to 4%. We took our guidance up, because of our comfort for how the brand was doing. We continue to believe that is a great guidance number, given what we have in store, what we've seen thus far, and the success that we've had in the actual comps of first and second quarter at Applebee's. And so you should feel comfortable that that sort of guidance -- we feel comfortable about given the back half of the year's plan. And again, they've got -- frankly to Bryan's question about IHOP, Applebee's does have tested proven items that they can talk about on television, and have had more time with it on the menu, so feel really good about that.

Got it. And then Jack, could you remind me about the higher staffing costs that was incurred in the Applebee's store operating margins?

Yes, essentially as I mentioned earlier, we staffed up to handle late night and lunch. It probably had an impact on margins of about 70 basis points. It's -- most of that it behind us, we are looking at that as a favorability in the second half. And I'd also say, we, in terms of commodities, we have always said that we would price for commodities and cover our costs there. And in fact, that's what we've done in -- through the first half. And our point of view on that, has not changed. We can still price in the second half, to cover any commodities.

And free cash flow in the second half, will be used for debt repurchases or other purposes?

Debt repurchases -- through 2011, and we've said this a couple times, but through 2011, all our free cash flow will go to reducing our debt.

Thank you.

And your next question comes from the line of Destin Tompkins of Morgan Keegan. Please proceed.

Thank you. I -- just Julia, I wanted to follow up on the question about Applebee's same-store guidance, from the standpoint of the comparisons are significantly more difficult in the back half of this year. And I just wonder, how you think about those comparisons? Is that really not that important, and it's more of a momentum? And you guys, clearly, had some great momentum, and you expect that to continue. But how do you think about that, given that you are anniversarying some different initiatives that seemed to be strong sales drivers?

Yes, great question. Two things. One, I never underestimate momentum. I think momentum is important, especially in our business. And I would also tell you, as I said earlier, some of the items that we have tested that are in the pipeline, I feel really good about. In addition, as I think I mentioned on the call, or in the script, that this notion of us being able to target each of the segments at Applebee's was sort of this bull's eye approach. And using different mediums for each of the day parts and really honing in on what each of those segments wants, needs, desires, and how to exceed their expectations, we really think we've hit a sweet spot at Applebee's. And that's the real focus for the balance of the year. And frankly, that's what gives us a part of our confidence, in addition to the fact that everything in the pipeline has been tested.

And on the remodel front, are you expecting continued contribution, more of a contribution? Sounds like you've been pretty pleased with the success of the remodel program. How does that factor into it?

Well, when you've got a chain of 1,800 restaurants in the domestic US, and 200 and some of them have been remodeled, it's not going to have a major impact immediately on comp sales. I think it everything to do with image and branding, and making people feel better about the brand. And I think as more of those get done, it contributes more of an overall image perception of, wow, something's really changed at Applebee's. But at 200 and some done, out of the 1,800 restaurants, it's probably not enough to be meaningful at this point. But I think what I'm really excited about, is people are doing them faster than they need to, and that tells me everything about the remodel. As you know, when you're a large franchise system, getting people to do it ahead of time, is pretty remarkable. So I feel good about the pace and the interest and the passion around it. I as time progresses it may be more of a factor, but it's still a small percentage.

Okay. Great. And lastly, Jack, on the tax rate, the guidance says 36% for the year. How should we be think about the third and fourth quarter from a tax rate perspective?

Well, as you mentioned, 36% would be the full-year. I think in the third and fourth quarter, it's going to be a little less than that to average out to 36%. But at the end of the year, we expect to be at that 36%. So second and third quarter, is going to be a little lighter than 36%.

Perfect. Thanks.

Thank you. And your next question comes from the line of Carla Casella of JPMorgan. Please proceed.

Hi. One follow-up on the asset sale proceeds. Are you required to pay down term loan with them, or can you -- are you flexible between repurchasing bonds and paying down term loan?

It -- refranchising proceeds would be applied first to term loan. So as long as we have term loan outstanding, it would it go to term loan.

Okay. And I think I may have missed this. Did you give your day part breakout, what percentage of sales was coming from each day part?

We do the basic -- we don't say as a percentage of sales comp. We do always say, what the day parts represent, in terms of a total. I can do those right now, if you want.

That would be great.

On IHOP, breakfast is 38% or so. Lunch is 30% I think or so. Dinner is 15%, and late night is about -- oh, I was close, breakfast is 36%, lunch is 32%, dinner is 20%, graveyard is 11%. That's on IHOP. And on Applebee's, it's breakfast is -- excuse me, lunch is 21%, afternoon is 15%, dinner is just shy of 48%, late-night is 15%.

Okay. And on the IHOP side, are you seeing -- is it -- are you seeing the QSR and other categories that are focusing on breakfast, pull any share you think from IHOP?

Yes, I've always said, we can't point to and identify something specifically where, gee, this is clearly having an issue. In some ways, you could argue more people are advertising breakfast and gives a halo for somebody like IHOP who is so well-known for breakfast but there's no question, we have one foot firmly planted in looking at and researching what if anything, could be impacting IHOP in that regard. So I wouldn't totally discount it, but it's not like the research has identified one particular brand or the fast-food segment is stealing some large share. We've held share constant, so that's less the issue, and it's more about what we can do to improve our brand.

Okay. And then one just last question. The IHOP at Wal-Mart, is that fully rolled out at this point?

Yes, it's in all 3,000 Wal-Mart stores. I did have somebody ask me the other day, if it was going to Sam's Club, and it is not. It's just in the 3,000 Wal-Marts, all 8 SKUs.

And that would have been in for the second quarter, or when did that begin? It was fully in all the Wal-Marts, I want to say, the end of May. It took probably 30 days to get it in all the Wal-marts. So it's maybe only been in the quarter, for maybe a month. So is that just going to be lumped in the IHOP business then, as the royalty?

Right. It's -- as we said on the last call, it's not a large number at this point. So it's just lumped in. When it gets large enough, we said we would break it out, but at this point it doesn't impact our numbers in any significant way.

Okay. Thank you very much.

Yes.

And your next question comes from the line of Bryan Hunt of Wells Fargo Securities. Please proceed.

Good morning. Just two questions on costs savings opportunities. I believe you mentioned in the last conference call, that the Company had made a significant progress in consolidating distribution centers within the purchasing co-op. Where do you stand on that progress? And could you remind us of the cost savings opportunities for the system in doing that?

Well, let me start with your second question first, and then I'll get to your first question. In terms of what we said long-term, the co-op would do for us, we said would it give us about a 3% to 5% cost reduction over the next couple of years. And we started out with 56 DCs, and we're down to 42 distribution centers as of the end of July. So we've had a reduction of 14 DCs. We still have quite a ways to go. We're trying to get into it the mid 20s, and we think we can get there by -- in the next, let's say, 24 months.

Okay, great. And then my next question on cost is, the termination of the Lenexa lease is going to cost you, I believe the number was $11 million or so in Q4, in terms of cash cancellation, or termination of that lease. What's the ongoing cost savings on a go-forward basis, of exiting that facility?

Yes, it's actually -- when we reported that out, in terms of what we were going to do, we said it had an internal rate of return, low double digits. I don't remember the exact number, but it was around 12%, 13%. And so if you look at the net cash that we're paying out, that's going to be the return on it, on an annual basis.

And then my last question, Julia, you all are taking price to offset commodities. When you look at your relative value scores, what does that tell you about your ability to take price? Do you think there's more of an opportunity to take price at Applebee's, relative to your peer group overall?

At Applebee's, we definitely have room to price with inflation. Franchisees are doing that, and we're doing that on our small Company base. And there's a high comfort level there, in terms of what we've seen and what the tolerance is. Remember, we play at the very low end, on casual dining and average check. So we are one of the value leaders, if not the value leader, with the average check. So there's a high comfort level there. If you go out and look at our proprietary research, it clearly says that we are seen and viewed on the casual dining side as and bar and grill, as one of the, if not the leader in value side. There's a comfort level there, and clearly, we've demonstrated that.

The franchisees do a marvelous job of the art and science of pricing. I give them a lot of credit. They've done a very good job of keeping it in that value arena, but still taking price. Remember, there's two ways to take price. You can do that off of existing items, and you do that inherently, as effective price off of new items. So it's a nice balance. As you know, by the end of this year, probably 95% of Applebee's menu will be new or improved. So they've been able to do that, but in a way that still creates the value message. And because we've -- all of the new products we've introduced at Applebee's have been engineered for value, it's kind of been a win-win for the franchisees, and for the company operators on the Applebee's side. So high comfort.

And you said 95% new or reengineered by the end of the year. Where do you stand today? How much of that -- (Multiple speakers).

About some 90% About some 90% Yes, we've made huge, hug progress over the last couple years on the menu. Really amazing.

Well, thank you for your time.

Thank you.

And your next question comes from the liner of Peter Saleh of Telsey Advisory Group. Please proceed.

Great, thanks. Jack, just a quick question on the G&A guidance. Does the $3 million in savings from the sales in New England restaurants, is that included in the guidance or still excluded?

That's excluded, because the New England market will not close until the fourth quarter, late fourth quarter. And so probably none of those, or very little of that G&A will be reduced in 2011.

Okay. And on the remodels for Applebee's, are you guys still seeing a 3% to 5% lift in sales from remodeled restaurants versus restaurants in the area that are not remodeled?

I'd say mid single-digit is a fair number, for what we're seeing pre-post net of control.

Great. On the commodity side, with the co-op, is it fair to assume that there's maybe a little bit of a lag? I mean last quarter, you didn't really see much commodity inflation. Now you're starting to see it, whereas some of your peers have been talking about commodity inflation for a couple quarters now. Is it fair to assume that there might be a little more of a lag with the co-op?

No, I think -- it's a great question by the way. I think the better way to think about it is, we guided at the beginning of the year that Applebee's commodities would be up somewhere between 1% and 3%. I think what we saw in second quarter, is they peaked. And I think that, that's still a great guidance for the year, in terms of commodity inflation.

On the IHOP side, we knew from the very beginning, we were going to have stronger cost increases on the commodity side, because they've had coffee, pork, and eggs, all three of which have sort of hit the ceiling. We don't usually hit high levels at the same time, but coffee, pork, and eggs. So that right around 5% inflation on the IHOP side, was what we said at that time beginning of the year. And I think we've peaked in second quarter. But we're still going see that, sort of if you were [viewed] at the end of the year, of where we hit in commodities. Those are fair numbers, probably around 2% to 3% on Applebee's, and 5% on the IHOP side. I just think, given where commodities are, we've been lucky to enjoy the benefits of that dynamic co-op. Without it, I think the situation would be unthinkable.

Great. Thank you very much.

Yes.

And your next question comes from the line of Michael Wolleben with Sidoti & Company. Please proceed.

Great. Thank you. I just wanted to circle back to the IHOP media spend shift again, one more time. If you kind of just assume, if it's not broke, don't fix it, can you give us more color of why you made that change? And which buckets you were spending money into? And then was that in mind, it sounds like you're going back to where you were in Q4 2010, and is there anything different now where you think you're going to be getting a different result from that media spend, as opposed to why you changed it?

So we don't disclose where we put our media dollars, because it's highly competitive. But think about us taking some of the dollars last year and moving into a bucket, because I think the team felt strongly there was an opportunity. They thought they could get more, if you will, and get better. And they determined that, that specific strategy was not workable, at least at this point, didn't have enough to make it work in their favor, so they've gone back to -- you're right -- what you would have seen last year with the belief doing that immediately, in addition to everything else I mentioned, will make a difference in the balance of the year for IHOP. It, in and of itself, isn't going to do what we need to do. It's the combination of all the things I've spoken about, that we have the confidence of keeping guidance where it is.

Okay. And then lastly, just can you give us some color on the margins and sales levels that those 66 units in New England? Is that going to be beneficial to operations here in 2012, as you move those off your books?

Peter, when we announced the sale, or not the sale, but the APA of New England, we also said that the four-wall EBITDA margin at that -- in those markets were about 11.5%. I don't have the actual press release in front of me, but I think I that's the right number. And as you know, our guidance for the year is 14.8% to 15.2%. So all other things being equal, once we sell those -- that market, the margin would increase. And again, all other things being equal.

Great. Thank you.

And your next question comes from the line of [Amode Gonoman] from JPMorgan. Please proceed.

Thanks. It's [Amode Gonoman] for John Ivankoe. In the first quarter, you talked to IHOP experiencing a tough January because of All-you-can-eat pancakes not working out that well. And then the chicken and waffles being well received. I was wondering if you could talk either quantitatively or qualitatively as to the trends at IHOP in terms of comps for this quarter, whether things got worse in June relative to April, or things were generally comparable across all the months?

So, great question. I think the way that you should think about it is in, when we were talking about first quarter, we didn't have the research results. We didn't have the media analysis done. So at the end of first quarter, as we went into second quarter, we knew that there was something not right. And we have done all of the work I just said, to determine this had less to do about all-you-can-eat, and much more to do with what the consumer told us they wanted differently out of the IHOP experience, and the media strategy. So when you couple those two things, that's the real lessons learned on a go-forward basis.

So it was lumpy and bumpy in first and second quarter. Clearly, when we talked to you -- I think it was in March, we were looking at the beginnings of some improvement. And that did not sustain itself, which is why you see the comp growth that you see. And that's why I think there is tremendous effort going on about improving that plan for the balance of the year, in all the areas I spoke of. So it's not just a promotion. It has a lot to do with the other efforts I described. So we may have had a false sense of what was wrong, when we looked at all-you-can-eat pancakes.

Okay. And then, just in terms of relative to maybe the beginning of the year, now that you have two quarters of negative comps behind you, in terms of IHOP, I think it's interesting that you have maintained unit growth guidance at the franchise level. So I was curious as to what kinds of color could you give about, how franchisees perceive the opportunity for development now, relative to maybe six months ago when comps were trending sort of upwards?

Yes, I think that's probably one of the big secrets of DineEquity and IHOP. If you think about it, since 2003 we've made our guidance every year for development numbers. We really have consistently had the franchisees develop since 2003. And every year, come rain or shine, we develop between 50 and 60 restaurants. And this year is no different. I think the truth of the matter is, they see this incredible brand with this incredible opportunity, and believe in fact, now is the time to develop, while they have that opportunity. And they have been able to take it out of either existing cash flow or they do a sale leaseback, but they believe in the brand, believe in the future, and it's an opportunity for them to penetrate those individual markets and be amazed.

So and a I said in my comments, the franchisees are very supportive of what the brand is attempting to do. And you have to remember, the average franchisee has probably been around for 20, 30, 35 years. There's a lot of history here, and a lot of belief in the brand and it's capability. I think if we hadn't driven market share and doubled it in the last eight, nine years, and done all that we had done for the brand, it might be different. But we get credit, both of us do, and the franchisees are a strong bunch to do what's necessary to keep that development pipeline. And they realize the importance of being one of the fastest growing chains in America from a development standpoint. So all works for us, and them.

Okay. That's helpful. Just one last one for Jack. In terms of the -- the discussion around the investment behind training for late night and lunch, was that an expense that was more so in the second quarter, and hadn't been going on in the prior quarters? Or like in the first quarter of 2011, was it a similar 70 basis point impact, in terms of the investment?

No, it wasn't, but it was starting to ramp up in the first quarter, but it didn't get to the level it did, in the second quarter.

Got it. Great, thanks.

And we have time for one more question. And that question comes from the line of Michael Gallo of CL King. Please proceed.

Hi. Good morning. Question on the IHOP side of the business. You mentioned in your consumer research, that one of the things your guests indicated was that they would like to see a little bit more value. It seemed like, or it seems like certainly was true again this quarter, that the average check has continued to move up on that brand. So I was wondering, I guess, two-part question. One, do you feel like there's -- that average check perhaps has moved up too far relative to the competitive set, and whether you think it ultimately needs to come back down a little bit? And two, whether some of the weakness would further allow you to get franchisees to use some restraint in raising prices, given obviously, some of the difficulties in the costing environment. Thank you.

I think when you're 99% franchiser, the reality is, it's partnership. I think there's accountability on the franchisor's perspective to value engineer products that can be priced at the right price. And I think it's the responsibility of the franchisees, not to gouge the customer. So we have this interesting partnership that we are working on, especially given a tough economic environment with commodities. But I do think it's a partnership.

I think there's the franchisor needs to spend more time working on engineering value into the products, so that they can be priced at the right price. And I also think our franchisees have to be mindful and thoughtful. So it's our job to educate that strategy, and make certain there is an understanding of the 380 some franchisees about what that looks like. And that's, I think, work that we have accountability for, and I think they have to recognize that consumers are much more value conscious in this environment, and we have to be very thoughtful about that. I think that -- the point I am trying to make is -- that work is coming together. And I have comfort that there is alignment, that we need to be thoughtful as we price, but also create engineered value such that it can be done in appropriate way. So I think it's partnership.

Okay, great. And then second question, just on the Applebee's side, I was wondering where the Applebee's system stands, in terms of being contracted on commodities? My recollection coming out of the first quarter was that they were 75% or so through the first half. And I was wondering whether we should assume the roughly 1.8% increase in check that you had on the Applebee's Company stores in the first half? Or whether we should expect similar kind of rate in the second half, or whether there's any additional plans to take pricing, given that -- it seems like there's going to continue to be some meaningful commodity head winds? Thank you.

Yes, in the second half of the year, about 50% of the commodities are protected at Applebee's through quarter four. And that guidance that we gave of 1% to 3% commodity increase for the full-year is a good number. I would say, closer probably to 2% to 3%, is fair. The notion of pricing on the company stores, there is opportunity in the second half to price. I think they may, but I think that notion of 1.5% to 2% total price increase for the year, is probably what the Company will come in at, probably a fair number to use.

Okay, great. Thank you.

And at this time I would like to turn the call back over to Julia Stewart for any closing remarks. Thanks, operator. And thank you all very much for joining us this morning. Our third quarter reporting date is November 3, 2011. And if you have any questions, please feel free to call Jack or myself. We're here for you, and we thank you for your time. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines, and have a nice day.