Dine Brands Global Inc (DIN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DineEquity Inc. third quarter 2011 investor conference call. My name is Carol, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this presentation. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Ken Diptee, Executive Director of Investor Relations. Sir?

Good morning, and thank you for participating in DineEquity's third-quarter 2011 investor conference call. Today I am joined by Julia Stewart, Chairman and CEO; Tom Emrey, CFO; and Greg Calvin, Corp Controller. Before I turn the call over to Julia and Tom, 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 average results to be materially different than those expressed or implied in such statements. We caution you to evaluate such forward-looking information in the context of these factors, which are detailed in today's news release, as well as in our Form 10K and Form 10-Q filings with the Securities and Exchange Commission.

The forward-looking statements made today are made as of the date hereof, and the Company assumes no obligation to update or supplement any forward-looking statements. Additionally, this call 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 investor relations website. With that, I'll turn the call over to Julia Stewart, Chairman and CEO.

Thanks, Ken, and good morning, everyone. I'd like to open the call by welcoming Tom Emrey, DineEquity's new CFO and Ken Diptee, our Executive Director of IR. Tom joins us from Universal Studios Home Entertainment, where he served as CFO before serving as Executive Vice President and Chief Operating Officer. He's got more than 25 years of finance and related experience, and I know his deep knowledge and consumer focused companies will serve DineEquity well.

Ken has held a number of investor relation roles, including time spent at Bank of America and the Walt Disney Company. Combined, Tom and Ken bring to the Company tremendous financial and investor relations leadership, and I speak on behalf of everyone when I say we're delighted to have them on board. Tom, Ken and I look forward to meeting with all of you in the coming months.

Turning to today's news, I'll start with several important events for the third quarter before moving into a broader discussion around performance of our Applebee's and IHOP brands. First, some observations for the quarter. Despite a tough economic environment, we have remained focused on our road map for achieving our long-term strategic goals and operating priorities.

While same-restaurant sales at both brands were not what we would have liked in the quarter, we continued to deliver on our long-term commitment to generate cash, manage G&A and improve our capital structure. We made additional progress on refranchising Company-operated Applebee's in the third quarter, as we entered into an agreement for the sale of 17 restaurants in the mid-south area.

I'm also pleased to let you know that just yesterday we closed on the sale of 62 restaurants in New England, another significant step forward as we execute on our plan to create a highly franchised system with Applebee's.

At IHOP, we saw intraquarter strengthening from adjustments we made in the second quarter, and our understanding of the needs and desires of the IHOP consumer continues to grow. Finally, we continued to leverage our talent with highly efficient shared services models, building a performance-driven culture across the entire organization that we believe is solidifying our franchisor of choice status.

In a challenging operating environment, we've adjusted our tactics throughout the year to drive same-restaurant sales performance. In an uneven economic environment, our entire organization remains laser-focused on ensuring we execute for the remainder of 2011 and into 2012.

Now, let's walk through the performance at each of the brands. I'll start with Applebee's. Domestic system-wide same-restaurant sales for the quarter slipped to a negative 0.3% after 4 consecutive quarters of industry-leading growth, as our Stacked, Stuffed and Topped campaign failed to resonate with guests. Upon recognizing this, we brought forward the release of our 2 for 20 menu refresh to mid-August. We believe this ability to be in nimble and make quick tactical adjustments is critical to successfully compete in this uneven environment.

Obviously, we lost some momentum in the quarter. However, we remain the clear leader in casual dining, and I continue to be extremely proud of progress at Applebee's and very confident in the plans we have in place for the brand. It's been nearly 4 years to the day since we acquired Applebee's and set out to transform the Company, and I'd like to take a minute to recap the progress we've made.

Our plan to re-energize this great brand calls for driving operational excellence and menu innovation, then implementing enhanced marketing, then improving strategic advertising and media, then executing widespread restaurant remodels and eventually continuing with franchise development. Applebee's has reached an all-time high in guest satisfaction and continues to raise the bar in terms of operational excellence.

Significantly, we've accomplished this while improving Company operated margins a full 4% due to a focus on labor management and the creation of our purchasing co-ops, which helps us manage commodities and distribution costs. We've transformed the menu. Since December 2007, we have either upgraded or replaced over 90% of the menu. That's a huge endeavor.

We have differentiated our brand by introducing new and innovative platforms such as the value-oriented 2 for 20, our low calorie Unbelievable and Under 550, and our popular Sizzling Entrees. We've improved Applebee's approach to marketing by building important relationships, including a long-term strategic partnership with ESPN and another with Weight Watchers. We're taking a much more holistic approach to advertising that encompasses print, digital, online and social media to support our traditional televised campaigns.

We've launched an ambitious remodel program and expect to have 28% to 30% of the system revitalized by the end of the year. During the quarter, our franchisees remodeled another 112 restaurants, bringing the total number remodeled so far in 2011 to 266. When combined with new openings, 491 restaurants now have our new look. Guests are responding favorably to the changes, and we're seeing significant improvements to restaurant performance as a result.

Lastly, we've made excellent progress with refranchising as we work toward our goal of becoming a pure play franchisor. Applebee's will now be 92% franchised once our asset purchase agreement for 17 restaurants in the mid-south area closes. We have a total of 342 restaurants -- we sold a total of 342 restaurants since the acquisition, making DineEquity 95% franchise.

4 years ago, we had no idea that we would be accomplishing these objectives during a credit crisis and a major recession. But we've not let that slow us down. I'm proud of the Applebee's team for what we have achieved.

Now, let's talk about what we're currently doing to drive sales growth. For menu, we have a robust pipeline for the remainder of 2011 and throughout 2012 that will deliver value and variety. Starting November 14, we will once again promote our successful Sizzling Entrees, supported by greater media weight during the holiday period.

We'll also launch new Under 550 items to give guests outstanding choice and make Applebee's the preferred spot in the neighborhood for dining out and eating right. The upcoming holiday season will be our biggest for gift card sales, with a new partnership with Target that will see cards sold in an additional 1,760 stores across the country to supplement our existing distribution agreement with Wal-Mart.

On November 11, we are excited to honor veterans and active-duty military with a free meal for our third annual Veterans Day program. Last year, we served over 1 million veterans and active-duty military. This year, our new Thank You movement will also allow guests to send a message of appreciation to current and former military, with a simple goal of expanding our thank you beyond just 1 day.

As bullish as we are about these initiatives, there's no question that the soft economy is creating challenges. We remain focused on delivering value and variety, innovating with our menu and marketing, controlling costs and saving our franchisees money, all at the same time.

Undoubtedly, the full impact of these initiatives will take some time, so we feel it's prudent to revise our Applebee's same-restaurant sales outlook for the year to a range of positive 1.5% to 2%. As a result of lower same-restaurant sales, our margins at Company-operated restaurants will obviously be impacted. We now expect our full-year margins to come in between 14.4% to 14.8%.

In summary, our revitalization efforts at Applebee's are progressing. While sales were not what we would have liked, I am very confident we have the right strategies and tactics in place to drive positive long-term results. With that, let's switch gears now and turn to IHOP.

During the third quarter, domestic system-wide same-restaurant sales declined 1.5%. We began to see some improvement from our decision to refocus our marketing efforts to return to our traditional media strategy. However, it wasn't enough to turn same-restaurant sales positive for the quarter, and there's more we need to do for both the remainder of the year and in 2012 to get IHOP sales growing again.

You will recall that last quarter we talked about driving same-restaurant sales by improving operations and re-energizing the brand. Our plan, which was based on our market research findings, called for more effective marketing, stronger value proposition, and enhanced menu offerings. I want to update you on the progress we're making in all of those areas.

In September, we held a highly successful IHOP franchise conference, focused around a plan to improve the basics. Specifically, quality, speed of service, and cleanliness. We received incredible buy-in from our franchisees, and their renewed energy gives me confidence they are up to the task at hand. We adjusted our advertising creative and continued efforts to optimize our media placement. Our new marketing chief is reviewing the marketing, digital and social media activities to identify areas we can improve upon.

We've redoubled our focus on delivering stronger value propositions and enhanced menu offerings to guests with Caramel Apple Sensations advertised at $4.99 and Trick-or-Treat All-You-Can-Eat pancakes. We've also restructured our menu strategy around 4 culinary platforms for equity, which includes our famous pancakes and coffee, from which we intend to build upon. Branded signature items such as stuffed french toast, which helps to differentiate IHOP and drive brand preference.

Enhanced value items, which provide everyday value versus the limited-time offers traditionally seen at IHOP. Health and wellness, which currently includes our Simple and Fit and kids menu offerings that provide healthy portions and options. These platforms are designed to help us deliver breakfast-inspired craveable foods across all day parts and re-energize IHOP to better meet the needs of today's consumer, and we are excited about the renewed focus they bring to our menu development efforts.

The results from some of these initiatives helped strengthen IHOP sales throughout the course of the quarter, but they did not do so as quickly as we would have liked. As such, we are revising just slightly our outlook for IHOP to a negative 2 to negative 2.5. Franchise development is on track, with franchisees expected to open between 55 and 60 locations this year. In September, IHOP opened its highly anticipated new restaurant in New York City.

However, the key take away is that we need to remain patient as we work to re-energize IHOP and drive sales. There is more that can and will be done. IHOP remains a strong, iconic brand. The steps we are taking will better differentiate and highlight its strength while also rebuilding an emotional connection with our guests to ensure they keep coming back.

Now, back to the bigger picture. 4 years ago, when we bought Applebee's, we said we were going to use the free cash flow to pay down debt, re-energize the brand, and sell off Company-operated restaurants to transition DineEquity to a pure play franchisor. As we continue to make progress towards those goals, we want to take a moment to review our performance on the metrics that are most important to a pure play franchisor.

In some of these areas, we have made incredible progress since the acquisition, including increasing consolidated G&A 17.4% to $159.6 million in 2010. Strengthening free cash flow from $95.3 million in 2007 to $153.9 million in 2010. Reducing total debt and Series A perpetual preferred stock from 2.7 billion to 1.9 billion.

As part of that deleveraging, term loan balances have been reduced by $110 million, and we retired $39.8 million of the 9.5% senior notes and $595.2 million of financing and capital lease obligations since the acquisition. I'm proud of this progress, and I'm confident we will continue to drive improvement in these areas going forward.

To recap the quarter, same-restaurant sales were not where we would have liked. However, we have plans in place at both brands and are focused on executing against those plans. It's also worth noting that the strength of the Company's fully franchised business model is that it somewhat mitigates earnings fluctuations based on restaurant sales.

And as you've seen from this morning's release, given that the Company's brands are nearly 95% franchised, we are providing an adjusted earnings per share EPS outlook to range between $4.20 and $4.30 per diluted share. We believe that adjusted EPS, along with cash flow and same-restaurant sales, are key measures by which the Company will be evaluating its success going forward. With that, over to Tom for a more detailed discussion of our financial results.

Thanks, Julia. I'll start today's discussion by reviewing our total debt position and share repurchases. Then I'll provide a review of our third-quarter financial performance. During the third quarter 2011, under the terms of our previously announced $45 million share repurchase program, we repurchased approximately 534,000 shares for $21 million at an average share price of $39.62.

For the foreseeable future, we may repurchase additional shares on an opportunistic basis. For the first 3 quarters of this year, we reduced total debt by $193 million. We reduced bank debt by $110 million, bond debt by $40 million, and financing and capital lease obligations by $43 million. At the end of the third quarter, our senior bank debt totaled $734 million, and our outstanding bonds totaled $785 million.

Turning to a discussion of our third-quarter 2011 financial performance, our third-quarter adjusted net income available to common stockholders was $19.1 million, compared to $16.6 million last year. Items contributing to this $2.5 million increase include the redemption of the Series A preferred stock and lower cash interest expense. These were primarily offset by the net impact of the sale of restaurants and closures and the slightly lower tax rate.

For the 9 months ended September 30, 2011, adjusted net income available to common stockholders was $62 million, compared to $51 million last year. This year-over-year increase of $11 million was primarily due to the redemption of the Series A preferred stock in October 2010, lower cash interest expense and the slightly lower tax rate, offset by the net impact of the sale of Company operated restaurants on segment profit.

For the third quarter, net income available to common stockholders was $15.5 million, compared to net income available to common stockholders of $7.8 million in the comparable period last year. This increase of $7.7 million was primarily attributable to lower non-cash interest expense from our refinancing in October of 2010 and lower debt levels and the redemption of the Series A preferred stock.

These items were partially offset by lower segment profit. This is largely because of the sale of 149 restaurants and closures since the third quarter of 2010.

For the 9 months ended September 30, net income available to common stockholders was $43 million, or $2.38 per share, compared to $28 million in 2010, or $1.60 per share. This increase of $15 million was primarily due to lower non-cash interest expense from our refinancing in October 2010, lower debt levels at lower interest rates on our refinancing in February 2011. The redemption of the Series A preferred stock. And a gain on the sale of 66 Applebee's restaurants.

Partially offsetting these items were the lease termination costs related to exiting the Lenexa facility, lower segment profit, primarily due to the impact of the sale of 149 restaurants and closures since the third quarter of 2010, and higher debt extinguishment charges, primarily for the repricing of our senior debt. Our tax rate for the 9 months ended September 30, 2011 was 31.8%, compared to 33.6% in 2010. The year-over-year decline is primarily due to our previously disclosed favorable first-quarter 2011 IRS rulings on the handling of gift cards.

Concerning Company-operated restaurant margin performance. Applebee's Company-operated restaurant sales declined $76 million in the third quarter 2011 versus 2010, due to the refranchising of Applebee's Company restaurants over the last 4 quarters. Applebee's Company-operated restaurant margin was 14.2% in the third quarter 2011 compared to 14.8% for the third quarter of 2010.

This decrease was primarily due to increasing commodity costs, which were approximately 4.6% higher quarter over quarter, incremental investment in local media advertising. These were partially offset by slightly lower labor costs and the beneficial margin impact of refranchised restaurants.

For the first 9 months in 2011 versus 2010, Applebee's Company-operated restaurant sales declined $222 million due to the refranchising of Company-operated restaurants in the last 4 quarters and the closure of 7 restaurants in 2010, partially offset by an increase in Company same-restaurant sales of 0.5%. Applebee's Company-operated restaurant margins were 14.4% for the first 9 months of 2011 versus 14.6% over the comparable period in 2010.

As for our G&A expense, third-quarter 2011 G&A expenses were $39 million versus $40 million last year, and we expect full-year G&A to be in line with our guidance of $157 million to $167 million. Third-quarter 2011 interest expense declined $11 million, primarily due to lower non-cash interest expense from our refinancing and lower debt levels.

The average debt balance during 2011 was $1.97 billion, as opposed to $2.11 billion during the same period in the prior year. Our non-GAAP effective tax rate was 36% in the third quarter, which is in line with our full-year guidance.

Cash flows from operating activities were $95 million for the nine month period versus $98 million for the comparable period in 2010. We are adjusting current year cash flows from operating activities for the fourth quarter due to net working capital payments from the sale of the New England restaurants. As a reminder, we always adjust cash flow from operations to the net working capital impact from the sale of restaurants.

Overall, we're very pleased with our year-to-date financial results, especially our year-to-date debt reduction. Based on our strong cash flow, we anticipate between $4.20 and $4.30 in adjusted EPS for the full year. Now, I'll turn the call back to Julia.

Thanks, Tom. I'd like to close by saying that we have a comprehensive plan in place to drive restaurant performance in the fourth quarter and beyond. As the economy remains unpredictable and challenging, offering everyday value in differentiated ways is key to ensuring we maintain our competitive advantage. We are focused on doing just that. With that, Tom and I would be pleased to take any questions you might have. Operator?

Thank you, ma'am. Ladies and gentlemen, at this time we're going to conduct our question-and-answer session. (Operator Instructions) Your first question comes from the line of Christopher O'Cull of STRH. Please proceed.

Chris?

Julia, my first question relates to the sales performance at Applebee's. You mentioned the Stuff Stack promotion disappointed, so I'm assuming the comp trend improved during the quarter, is that true?

Slightly, I wouldn't say huge amount, but certainly we saw a change once we got out of that promotion and into the 2 for 20. We were comping some incredible results, as you know from the previous year. If you think about the last -- forget about third quarter for a second. But you think about the last 13 months before third quarter, our comps were anywhere from a positive high of 6 and a low of 2. We had huge comp sales increases, far out seating the industry. We knew going in we'd have some tough comps, and we thought Stuffed Stacked would do better than it did. Disappointing, but clearly, it just didn't resonate with guests, which is why we switched it out sooner than we anticipated and went for 2 for 20.

It seems value is more important than product innovation, then, in this environment. Is there a risk that the Sizzling Steak promotions does not have a strong enough value message in the fourth?

It's really a good question. There's three things I would say to that. One, and I don't think I've said this in the script, there is a price point on that in the promotion that starts November 14, so I think that is helpful. And secondarily, with beef prices just skyrocketing, I don't know how many people will actually be on television in fourth quarter with a beef item, whereas our products -- the Sizzling Entrees, does have a beef item in it, which I've tasted it, and it's fabulous. And I think both the fact that it's innovation, that is a beef product and it's got it price point attached to the promotion I think helps. All of the items are innovative and creative, but I think they have this whole platform attached to them with a price point. I think all those things in combination work in our favor.

Okay, great. And just lastly, is there any way you can bifurcate the sales performance of franchisees who have remodeled stores versus ones that have not? Are they seeing healthy lifts after remodeled?

I think we said in prior quarters, we're averaging about a mid-single digit comp growth from franchisees who've remodeled, so clearly, they're getting an ROI, they're pleased with the results, and we're pleased with their performance as well. And then once a full year lapsed, the sort of go into another whole different category. But that's been pretty much the standard list. Now, mind you, that's an average. I've seen some guys considerably higher and a few guys lower. But it's a good mid-single digit growth.

Great. Thanks.

Thank you, sir. Your next question comes from the line of Bryan Hunt of Wells Fargo. Sir?

Thank you. Julie, I was just wondering, along the lines of what Chris was talking about, you pulled forward this value message. And it seems like -- not only at IHOP, but also at Applebee's, did you see an immediate response from the consumer when you did this? As well as, have you seen any of your competitors respond with new and more exciting value messages as well?

Well, the latter would be, I think some of our direct and indirect competitors are definitely focused on value innovation, maybe not so much. But I would tell you 2 for 20 has been successful for us. I think I've said that more than once. Both on the existing menu, it's 18%, 20%, when we're not advertising, and when we are advertising it, gosh, the mix can go as high as 23%, 25%. So, there's no question consumers like it and want it, and we do see the reaction.

But the one thing I will say that we have learned is, from our consumer research and just our own reaction, I think the combination of the value and the innovation works for us. Because just same old same old, they get tired of it. So, they want the value, but they clearly have told us, anyway, our consumers have told us, they want innovation. So, it's both.

And then next, looking on the financial side, has there been a change in strategy with regards to use of cash? You repurchased $21 million of stock in the period. And if I look at the last two quarters, the Company's paid down a nominal amount of debt, just on the last two quarters. I know since the beginning of the year that you paid down about $13 million in debt. You mentioned in the script that stock repurchases are going to be opportunistic. Is -- where is your temperature on debt repurchase versus a stock repurchase in the intermediate term?

I'll let Tom answer the question. The one thing I will say though is, is we continue to pay down a substantial amount of debt every time we sell Company restaurants. So, if you think about yesterday's closure, all of that is going to pay down debt. So, we've got to be careful here. It's a fairly large amount. The total debt repurchased year-to-date has been $193 million, so we pay down a lot of debt, much of it coming from the sale of Company restaurants. But I'll let Tom talked to the strategy team.

Our strategy is clearly to continue to pay down debt, and I think you should look at the stock repurchases simply an opportunistic reaction to the market price of the stock. But there's no wavering in our commitments to pay down our debt.

Okay. Thank you for your time.

Thank you, sir. Your next question comes from line of Michael Kelter of Goldman Sachs.

Hi, guys. I wanted to ask about the IHOP trends. You mentioned intraquarter strengthening, but yet if I take the full year guidance that you gave, the updated guidance, it actually implies negative -- the midpoint implies negative 2% same-store sales in the third quarter versus 1.5% in the third. I wanted to understand if there was anything that we should be aware of in terms of just the cadence, or is that just conservatism? Or how I should think about that.

Probably all of the above. I think we're being prudent. I think we've been disappointed that we haven't been able to move the needle as fast as we would've liked, given all the effort that we put into play, and I think we're being appropriate with that guidance. And we're doing all the right things. We've got plans in place for fourth quarter, but truly, we were disappointed with third. That it didn't move as fast as it could, so think of that as being prudent. I wouldn't over react to the difference between a negative1.5% and a 2%, but I think we're just being appropriately prudent.

And then on Applebee's, I want to follow-up on a question from earlier. You had mentioned that part of the softness in this quarter was from a promo that didn't resonate as well as you had hoped, and now the promo that you are offering, I similarly I'm wondering whether the value is compelling enough, given the environment that we're in. Do you guys have a research process or a test process for all these different promos before you execute? And how do you go about that, and how do you get confidence which ones will drive sales?

Yes, it's a great question. So, as I mentioned earlier, there is a price point on Sizzling Platters, so I don't want to lose sight of that. We don't -- for competitive reasons, I'm not going to sit here and go into a lot of detail, but I think it's -- we know it to be a compelling price point. And a lot of times, not all the time, but the large majority of time, we're able to media test promos for the following year. So, we start with a consumer model, do you like these ideas? Then we go into in-store research, do they meet the operational performance? And then we're able to put them into a media format, which is what we're doing at both IHOP and Applebee's in fourth quarter for programs next year. And we're blessed that we have franchisees that are willing to spend some dollars to do just that.

So, we're blessed in that way with franchisees willing to support this notion of testing. Because they have to go out, in addition to whatever's on network television, and do something locally. And so we've got a tremendous partnership with them that they're willing to do that. So, that's what gives us confidence. And every once in a while, something happens between the test and the national promotion that just doesn't resonate. But I would tell you that's few and far between.

And lastly, given kind of the lost -- I guess on Applebee's, some of the momentum that's been lost and maybe the choppier macro and tighter money around the general, I'm curious about the refranchising effort. And you had historically been able to get 5 to 6 X. It seems live of late it's more like 5 to 5.5. Could slip to the low end or below that 5, 5.5 range? And is there a floor at which you would just wouldn't sell?

There is a floor, we don't publish that, but we have worked tirelessly with our board of directors to come up with sort of a walk away price for which we simply will not exceed. But we continue to have interest in the remaining markets from existing and new franchisees that gives us confidence that we'll get to that right -- it's not just price though. In fairness, it's also about the operator, the capability, the belief in our long-term vision, the desire to remodel quickly. That's a very important -- we don't spend a lot of time talking about that, but all these folks that are buying these restaurants are going to remodel them very quickly. That's really important to us. So, it's not just selling them the marketplace, if you will, but then they have to have the cash available to additionally go in and do those remodels quickly. It's all of that combined, but again, I think I've mentioned before, we don't announce sales until the asset purchase agreement has been signed. We don't announce anything in LOI, only an asset purchase agreement, so obviously, you have to look for that in the future.

Very helpful. Thank you very much.

Thank you, sir. Your next question comes from line of Peter Saleh of Telsey Advisory Group. Sir?

My question -- just a quick question on the remodels. I know you said mid-single digit lift in terms of same-store sales from the remodels. Could you just give us a little bit of a breakdown? Is that -- are the franchisees seeing that all coming from traffic, or are they raising their prices to try and offset some of the costs that they just invested in the remodel?

No, it's almost all traffic. The guys are not raising their prices in conjunction with the remodel. I think I mentioned before, I find the Applebee's franchisees some of the best in the industry about the art and the science of pricing, and these guys are smart enough to realize that consumers automatically assume when you remodel, you raise prices. So, I think they're probably more sensitive about that than at any other time about not taking pricing, but rather being thoughtful about the ROI. And frankly, they've been talking to each other regularly about the kind of lift they're getting, so I think that gives them confidence. We have enough now in the pipeline that people know we're doing well with the remodel, so I'm not seeing that at all.

And then on the commodity outlook, I know it sounds like most of your peers are talking about significant commodity inflation in 2012. What are you seeing, and what are your expectations on pricing for next year?

Yes, great question. As you know, we started the year saying Applebee's would be a 1.5% to 3% price increase, and we thought it would all come in the second half. It did, it just came a little higher than we anticipated.

We've certainly seen more price increase than we first thought, as you can see from our own Company operations, even with the help of the co-op and all the work we've done. Thank goodness for the co-op. We would be substantively higher. But I think our preliminary view, and again, we'll give a full forecast on our March call, we'll give full guidance and forecast. But we don't see a lot of letting up for 2012. It looks like it's going to be another aggressive commodity increase. Don't have an exact number. It will be interesting to see whether it slips between Applebee's and IHOP or stays the same. As you know, IHOP this year had extraordinary increases because of pork and coffee. It will see if that rotates next year or stays the same, but I don't think we're going to see a flattening out here for a while.

Great. And then just any regional commentary or weekday versus weekend? What are the trends there?

I don't see anything unique. I think you'll always see little pockets where unemployment might be extreme, but no huge differences that would be worth noting. We -- I'm just -- my mind is racing, but between day parts, nothing is coming to mind that would be astronomically different in terms of traffic or check.

Great. Thank you very much.

Thank you.

Thank you, sir. Your next question comes from line of Reza Vahabzadeh of Barclays Capital. Ma'am? Sir?

Good morning. Hello?

Reza?

Yes, hi, Julia.

Hi.

Just wondering if we should expect to see a greater declines in the G&A cost base in the coming quarters or year, as you've now sold a number of stores, including the New England portfolio?

Well, the best way to think about it, go back to the website. And as you know, we always say that each time we sell a restaurant, it's worth about $40,000 cut in G&A. There be a tail at the very end. We'll be in a better position to share that with you on the March call, because we're taking a hard look at, what is that tail? It takes a little bit of time to affect that.

But you'll see, as we kind of clear it out and clean it up, you'll see probably some additional -- I think we'll well exceed the $50 million we said we would hit in steady-state. To the degree that we'll achieve and beat that $50 million, I'll have a better sense of that next year. We're doing some additional work, but clearly, the $40,000 per store still stands.

Right. And then on the Company restaurant margins, how much pricing did you have in the quarter to offset the 4.6% cost inflation?

A little over 1%.

Got it. And do you anticipate food cost inflation in the fourth quarter to be similar to the third quarter as well?

At least the same, if not slightly higher. I think what's really saving us right now is all the work that the co-op has done.

Right. And then on the Company restaurant margins, how much pricing did you have in the quarter to offset the 4.6% cost inflation?

A little over 1%.

Got it. And do you anticipate food cost inflation in the fourth quarter to be similar to the third quarter as well?

At least the same, if not slightly higher. I think what's really saving us right now is all the work that the co-op has done.

Right. And the key drivers of the higher food costs for you at Applebee's is what, beef, pork, and all the other culprits?

It's mainly the center of the plate, you're absolutely right. And at IHOP it's similar, although at IHOP, we took a greater hit on pork and coffee. We just don't sell a lot of coffee at Applebee's.

Sure. And lastly as far as CapEx next year, would you anticipate that number to be well below this year's number, since you've -- you would have completed your CapEx program?

Well, we're not done with remodel. So, we still have existing restaurants in the portfolio. We'll have a better number at guidance in March for the exact CapEx rollout. Anticipating -- we'll see what happens between then and March, but assuming we do have Company restaurants, then we would proportionally still be remodeling. That was the commitment we made to our franchisees, that we would proportionally remodel a forth, a forth, a forth, a forth with whatever's left in our portfolio.

I see. So, you're not done with your -- you will not be done with your remodeling program of your Company operated stores this year?

That is correct. We still have restaurants that have not been remodeled, and whatever's left in the beginning of the year, we will proportionally send out in our guidance what that remodel percentage would be and the cost have stayed the same.

I see. And then just to go back over a question that people have asked, is there any need to increase the portion of your promotions that are value-oriented, just given the environment that you're facing? Or is it just the type of products that you're offering?

Great question. I think both brands are now duly focused on reengineering products, such as they can put them on television and that franchisees can make money, but that they offer incredible value to the consumer. Both with innovation, product quality, but also the ability to reengineer them, such that everybody makes money. The better way of saying that is we are not taking existing items and discounting them and putting them on television. We're value engineering such that everybody makes money, which is really what franchisees demand and expect. So, that's part of it. And then the other part of it is we are being highly sensitive about that price point and value message for both brands. And I think there's probably some additional work to someone's comment earlier, about making certain that at both brands, we know what that -- I call it cliff, what is that price point for which -- you have to stay within? What's that -- it's not really price elasticity. It's more what constitutes a great value at both brands, and that's some work we're doing as we speak. To make certain we have the right number.

Got it. Thank you.

Thank you, sir. Your next question comes from the line of Bryan Elliott of Raymond James. Sir?

Good morning. I wanted -- a couple questions. First, wondered if I could get an update on the status of the late night efforts, that's been an area of marketing focus and was driving some good results in recent quarters? Did that sort of lap and peter out? Or what's the status of that?

So, two things. Great question. The franchisees really get a lot of credit here, because it was some of their innovation and creativity that we then shared with the rest of the system from a best demonstrated practices perspective, and many, many more franchisees have picked up those programs. And then you saw us, gosh, I think it was about midyear, we went on national television and tagged our existing spots that are really focused on dinner and talked about all restaurants, the large majority of our restaurants the open until at least midnight. That certainly has helped us. And thank goodness NFL football is on. So, we're continuing our work with ESPN, and that partnership is extremely successful for us. So, between ESPN, open until midnight, some of the other programs that people are doing on a local basis, those things have been very, very helpful. And obviously, our job is to continue to create new programs, which we are in the midst of testing and doing some additional work at the late night. So, it still has a good growth, and we're still seeing that at late night, across-the-board, specifically in traffic.

Okay, great. And, Tom, could you -- would you mind drilling down a little more on the Applebee's Company store margin difference? Like, how much was the food cost swing? And also, if you could give us how much depreciation amored as a percent of sales there was this quarter versus last quarter at the Applebee's Company restaurants? So we can get a cash flow number, rather than an EBIT number?

Right. Well, for the quarter, the variance was 0.6%, as we said. And that was driven by food cost at about 0.5, marketing about 0.4, depreciation, 0.4 and the effect of refranchising the restaurants was a positive 0.6. And other was positive 0.10.

The other being the balance. Okay, so -- I'm sorry, 50 bips of food cost, 40 bits of --

Marketing.

Marketing. 40 of depreciation and 60 from re-fran to the good. Okay, great Thank you.

Thank you, sir. Your next question comes from line of Destin Tompkins of Morgan Keegan. Please proceed.

Thank you. Julia, there's been a lot of discussion around sales trends. You talked about it early on, about kind of losing some of your momentum at Applebee's in the quarter. And I just kind of wondered, overall, given everything you've got in the pipeline, and given the comparison that you mentioned, the more difficult comparisons, what's your overall conference level? As you look at the sales momentum, can you recapture that over the next couple of quarters, or is it going to be pretty difficult given that the comparisons are pretty stiff for the next couple of quarters?

The fourth quarter comparisons get a little easier. I didn't talk much about that, but they do get a bit easier when you're comparing year-over-year, so we have that. I firmly believe and our research would indicate that we really just missed the mark with the promo. It just didn't resonate with guests. And when you think about 2 for 20, we have extreme examples of that being successful, and the innovation we've taken on, feel good about that. And then as we get into 2012 when I share guidance, we'll give you a lot more detail for next year about the kinds of things that we're doing that we feel good about that should help us with that momentum. But it does get a little bit easier in the comp comparison for fourth quarter. But momentum is momentum, and we don't know. We've got to see, we've got to wait and see. That's why we're being prudent on the revised guidance.

Okay. And on the Sizzling Entrees, is there anything new within the Sizzling Entrees, or is it pretty similar to what you guys had last year?

No, all the products are new. And I think I just mentioned one of them. I was trying not to say too much about it. Trying to keep a little bit of a surprise for the competitive set. But they are new products.

Okay, great. And then lastly, on the refranchising, as we think about 2012, should we just assume that only the transactions that you've announced, should we essentially assume those were the only ones that will occur? Or should we think about the back half of the year, maybe the activity picking up? How do you want us to think about refranchising going forward?

I would suggest you do what we have suggested you do for the last four years. Which is you don't assume any sales until the day we announced it. It makes it a lot easier to model and work through. We strongly suggest that you do exactly what we are doing, which is assume they're all in the portfolio until we announced that they're being sold.

Great. That's helpful. Thank you.

Thank you, sir. Your next question comes from line of John Ivankoe of JPMorgan. Sir?

Great, thank you. Julia, you made some interesting comments about the IHOP franchisee conference. And it seems like there were some very basic things at the restaurants that, maybe they're not doing as well as you or others think they should. And something that stuck out to me was something called cleanliness, which as you kind of appreciate running a restaurant company, that's probably the first thing that you need to be. I guess the question is, are you changing anything, the way that the system is being managed or monitored on a store by store basis to make sure that you can be leading the industry with basics like this as opposed to kind of having to have a convention to identify some things that might be issues?

It's a fair question. The truth of the matter is, we're accountable. And so it starts with us. So, I would say our accountability may have slipped a little bit in that regard. I would criticize the franchisor first and foremost before I would criticize of the franchisee. We're accountable, we didn't look at it as closely and carefully as we should have, and to your point, we're doing some additional work in all three of those categories to make certain we are measuring the right thing and holding people accountable. But truly, it starts with us. I would hold the franchisor accountable, which we are, and we are changing some things specifically to ensure that we hold the franchisee accountable in a more meaningful way. So, the answer is yes, we're making some changes. And as you might well imagine, the large majority of franchisees support that.

Obviously, one of the -- the point of the story is running a fairly G&A light model. Thinking about with IHOP and Applebee's, and obviously I understand they're different systems. Might you have gone too far in terms of how light your G&A is? Or should they be kind of a reinvestment to make sure that franchisees are getting the support that they very well might need?

We run about, per restaurant on the IHOP side, it's one franchise business consultant for every 25 or so restaurants. So, I think it's less about the notion of, do we have the right number per. We've been pretty consistent with that. I think the bigger issue is what do you measure? And how are you measuring it? And I would tell you, therein lies some opportunity, and it's our accountability.

Okay. Thank you.

Thank you, sir. At this time, your final question is from Michael Gallo of CL King. Sir?

Hi, good morning. Most my questions have been answered. Just want to delve in a little bit on Applebee's. Did you see any change in how the consumer use the consumer used the brand in terms of mix of 2 for 20 or in terms of weakness at certain day parts? I would assume, like the lunch day part got more competitive in the quarter, so any commentary on just what you saw trend was there? Thank you.

No dramatic changes in the trend. We -- as I think I've mentioned before, we've been working hard on each of the day parts, and I would tell you that each of the day parts has got a focus and opportunity. I didn't see any huge changes quarter over quarter in what we're doing or how we're going about it. Pretty much the same.

Thank you.

At this time, ladies and gentlemen, there are no further audio questions. I'm now going to turn your presentation back over to Julia Stewart for her closing remarks. Ma'am?

Well, thanks very much for joining us this morning. Our fourth-quarter and fiscal year-end reporting date, as I mentioned earlier, is March 1, 2012. If in the meantime any of you have any questions, please feel free to call Ken, Tom, or myself. We're here for you, and we very much thank you for your time.

Ladies and gentlemen, this concludes your presentation for today. You may now disconnect your lines. Have a great day.