Dine Brands Global Inc (DIN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DineEquity, Inc. second-quarter 2012 investor conference call. My name is Tony and I will be your operator for today. At this time all participants are in a listen only mode. Later on we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Ken Diptee, Executive Director of Investor Relations. Please go ahead, sir.

Good morning and thank you for participating on DineEquity's second quarter 2012 investor conference call. Today I'm joined by Julia Stewart, Chairman and CEO, and Tom Emrey, CFO. 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 are forward-looking and involve known and unknown risks, uncertainties and other factors which can cause the actual results to be materially different than those expressed or implied by such statements. We caution you to evaluate such forward-looking information in the context of these factors which are detailed in today's press 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 press release today and are also available on DineEquity's Investor Relations website. With that I will turn the call over to Julia Stewart, Chairman and CEO. Julia.

Thanks, Ken, and good morning, everyone. Welcome to our second-quarter 2012 earnings call. We will provide additional details on the press release we issued this morning regarding our results before opening the call for your questions.

I'd like to start this morning by directing your attention to the press release we issued last week announcing the agreement to sell 65 Applebee's Company operated restaurants located in Michigan to TSFR Apple Venture. We are very excited about this transaction as we approach the next step in our strategy and realize our goal of becoming 99% franchised. I'll provide more details later.

Now with that I will first review some highlights for the first half of the year and then Tom will recap the second-quarter financial performance. We are pleased with our financial performance for the first six months of 2012 and remain disciplined on managing G&A, generating strong free cash flow, reducing debt and fully leveraging our shared services model.

In the first half of the year we generated substantial free cash flow which enabled further debt reduction. Our adjusted earnings per diluted share increased by 3% compared to the first six months of 2011. And we have revitalized Applebee's brand.

At IHOP we are in the process of testing a variety of new menu items. We are also continuing to value engineer the menu, improve operations at the restaurant level and we have recently commenced a new advertising campaign to re-launch IHOP in the eyes of our guests, play to our strengths and redefine the American breakfast experience. We know what areas need to be improved upon to restore IHOP's performance and it's clear to me what needs to be done.

I am very pleased to report that for the fifth consecutive year both Applebee's and IHOP were again ranked number one in their respective categories by Nation's Restaurant News on the basis of US system wide sales for the latest completed fiscal year.

Now turning to Applebee's, with the signing of the Michigan deal we have now either sold or entered into agreements to sell all of the Applebee's Company operated restaurants that were acquired when we completed the merger in 2007, with the exception of 23 test market restaurants that we intend to keep, as we have mentioned in the past. I am thrilled as the Company starts a new chapter in its history.

Since acquiring Applebee's we have remained both disciplined and laser focused on achieving all of the goals we established four years ago. We have completed the Applebee's refranchising and transition to 99% franchised system upon closing of these transactions; we will have substantially lowered G&A by over $50 million; we revitalized Applebee's with new marketing and advertising, major menu innovations, an 18-month pipeline of new and tested menu items and a remodel program that is running ahead as well; we have been at the forefront on creating popular value platforms; we've improved the operations of both the Company operated and franchise restaurants; we formed a purchasing co-op to manage procurement for both brands, translating into greater stability and significant savings for our franchisees; we completed a sale leaseback agreement for 181 properties and closed on a sale-leaseback transaction for the support center in Lenexa, Kansas; and lastly, we implemented a shared services model enabling team members across the organization to work more efficiently and support franchisees in a more meaningful way.

I am extremely proud of all of our accomplishments, especially during a challenging macroeconomic environment that no one anticipated when the acquisition was made. Now we still have a lot of hard work ahead, but I am very proud of our management team and everyone who played a role in helping us complete the Applebee's refranchising and reach this very significant milestone. I want to say thanks to all of you.

In preparation for this eventuality we have identified cost reductions arising directly from the refranchising which will generate annualized G&A savings. As part of our commitment to deliver sustainable shareholder value, disciplined G&A management has remained at the utmost importance.

In addition to these savings, we conducted a comprehensive review of our cost and organizational structure to ensure we are utilizing our resources wisely as a fully franchised company. Further annual G&A reductions were identified which we are in the process of implementing. The company expects that these combined actions will result in approximately $10 million to $12 million in annualized G&A savings. We expect that these savings will begin to be recognized in the fourth quarter of 2012.

The work force reduction associated with these savings is obviously difficult for impacted employees, but we feel it is essential in order to better align our cost structure. This action is necessary to change the scale of the Company and deliver additional value to our shareholders.

As you know, we normally update our financial guidance after each transaction closes. Given that there are three pending transactions which are expected to close fairly close to one another, we will revise 2012 guidance only once after all three of these deals are completed, presumably in the third quarter or early fourth quarter of 2012.

Now turning to second-quarter results. Although we reported solid financial performance we are not satisfied with same restaurant sales and traffic growth for either brand. Later I will tell you more about what we are doing to improve performance. But first let's begin with a look at the second quarter for Applebee's.

On same restaurant sales Applebee's domestic system wide same restaurant sales increased by 7/10 of 1% in the second quarter compared to solid growth of 3.1% in the second quarter of 2011. Same restaurant sales were not immune from the slowdown in the casual dining industry during May, partially due to broad economic drivers, most notably consumer confidence.

We are focusing our efforts on driving sales and traffic while improving the guest experience by providing value and variety that is unique to Applebee's. On promotions and late night, in February we refreshed our signature 2 for $20 menu with the launch of jazzed up flavors of Bourbon Street. And remember, we were the first in the industry to offer 2 for $20. As we said before, this value proposition continues to be consistently well received by guests, especially when we update it with new menu items.

The late-night day part continued to contribute solidly and we are executing on a strategy to grow late night through more effective marketing, better visualization of social media and promotional events.

On innovation, in July we launched Applebee's and new campaign, See You Tomorrow, which communicates that we are doing whatever it takes to make sure our guests return. The campaign includes TV, radio online and outdoor ads to encourage repeat visits by highlighting Applebee's new fresh flavors of summer menu and the everyday value our guests have come to expect.

On the remodel program, the healthy pace of the Applebee's remodel program continued in the second quarter with 96 restaurants remodeled by franchisees. When total remodels are combined with the new openings 783 Applebee's restaurants, or 42% of the domestic system, have the revitalized look. We expect that more than 50% of the domestic system will have the updated look by the end of 2012.

Lastly regarding development, Applebee's franchisees opened three new restaurants in the second quarter of which two were domestic.

Now I'll review IHOP's performance for the quarter. While IHOP has made some operational progress, sales are not yet where we expect them to be. Re-energizing the brand remains a high priority.

On same restaurant sales, IHOP's second-quarter domestic system wide same restaurant sales declined 1.4%. Sales were also partially impacted by the economy driven slowdown experienced during the quarter.

On operations, we refined our restaurant operations based on feedback from guests. We completed the rollout of the two key components of our operations improvement plan which I discussed with you previously. These programs are aimed at raising the bar on providing guests with an exceptional dining experience. We know that the job is not yet done, but we have made real progress.

On value, with a continued focus on the value conscious guest we recently launched a trio of signature pancakes starting at $4.99, demonstrating our commitment to offer both value and innovative breakfast options all day.

On the menu, we are continuing to streamline our menu and graphics to simplify the ordering process for our guests and improve execution in the back of the house. Our goal is to remove items that are underperforming and difficult to make. We are currently testing exciting new menu items, some of which we expect to include in the featured items menu later this year.

Additionally, we are accelerating our development pipeline to offer new and cravable food to satisfy the guest. We are also continually working to develop new menu items to improve our franchisees' profitability and provide value to guests.

On advertising and marketing, in May we launched an exciting new advertising campaign refocusing on our heritage and what we do best, breakfast. The campaign leverages the strong emotional connection that this iconic brand provides to our guests by offering Everything You Love About Breakfast, making IHOP your favorite place for breakfast anytime of the day.

The new IHOP Everything You Love About Breakfast campaign leverages the brand's strong emotional connections by bringing actual guest stories to life. Our new TV ads showcase testimonials from real customers featuring our products and the guest -- the great guest experiences at our restaurants. Our new tagline says it all, IHOP, Everything You Love About Breakfast.

Regarding development, IHOP's franchisees opened six restaurants in the second quarter, all of which were domestic. And I'm pleased to announce that our franchisee in the Middle East, the Alshaya Group, is scheduled to open its first IHOP in Dubai later this week under our development agreement for 40 new IHOP restaurants over the next few years.

Lastly, as you saw in a separate press release issued this morning, Jean Birch, President of IHOP, will be leaving the Company effective August 27. I'd like to thank Jean for her contributions and dedication both to DineEquity and IHOP. Until a successor is identified I will assume day-to-day leadership of the brand and provide strategic direction.

We have a plan in place to drive IHOP's performance going forward. We are better utilizing enhanced media and new advertising to improve how we reach our guests. We remain focused on delivering a solid value proposition to address the needs of our value conscious guests. And lastly, we are improving operations at the restaurant level to exceed our guest expectations. We believe that this strategy will culminate in ultimately driving traffic and sales; we have done it before at IHOP, we will do it again.

Now before Tom walks you through the second-quarter's financial results, let me reiterate that we are committed to the revitalization strategy at Applebee's through broad-based innovation. And at IHOP we have adjusted our approach to reinvigorate the brand. While we have accomplished much we are cognizant that there is more to do and our team is working hard on these details. With that I'd like to turn the call over to Tom Emrey, our CFO, for a discussion of our second-quarter results. Tom.

Thanks, Julia, and good morning, everyone. I'd like to review a few highlights of the press release we issued this morning. In the first half of 2012 we reduced our total debt by $88 million; bank debt was reduced by $69 million, bond debt by $4 million and combined financing and capital lease obligations by $16 million. Our leverage ratio at the end of the second quarter was 5.3.

Our highly franchised business model continues to generate significant stable free cash flow, driving approximately $800 million in debt reduction since the Applebee's acquisition in November of 2007. Lower debt levels led to a $3 million reduction in interest expense compared to the second quarter of 2011. For the first half of 2012 we generated cash flow of $32 million; note this is net of semiannual interest payments on our 9.5% senior notes.

Regarding income, for the second quarter adjusted net income available to common stockholders was $19 million or $1.06 per diluted share compared to $17 million or $0.90 per diluted share a year ago, an increase of 18%. The year over year increase was primarily due to lower cash interest expense and lower G&A. These were partially offset by lower segment profit due to the write-off of certain rental segment receivables.

Our franchise segment gross profit was up approximately 5% over the second quarter of 2011 with the franchise margin improving to 74.3% for the second quarter of 2012, up from 73.4% a year ago. The improvement was primarily driven by an increase in effective franchise restaurants due to refranchising and new restaurant development by franchisees year over year.

For the second quarter of 2012 Applebee's Company operated restaurant margins for the 160 restaurants was 16.9% compared to 13.4% in the second quarter of last year. The increase was primarily due to a higher average guest check, less depreciation expense and the refranchising of lower margin Company operated restaurants. These items were partially offset by commodities inflation.

The effective tax rate for the second quarter of 2012 was 38.2% compared to 81.1% in the second quarter of last year. Now the prior year effective tax rate was higher due to an increase in unrecognized tax benefits and certain adjustments related to state deferred taxes applied to lower pre-tax earnings in 2011.

Now in G&A, G&A expenses were $37 million for the second quarter of 2012 compared to $38 million in the second quarter a year ago. The year-over-year decrease was primarily due to lower personnel costs and professional services expenses, partially offset by higher occupancy costs. As discussed earlier, we anticipate annualized G&A savings of approximately $10 million to $12 million.

During the third quarter severance costs associated with our G&A reductions will be approximately $4 million. These severance costs will be partially offset by an estimated third-quarter G&A savings of $2.5 million. While the exact amounts and timing are unclear because of deal closure timing, the Company expects to begin to realize net savings in the fourth quarter of 2012. And to reiterate, we will revise 2012 financial guidance after all three deals are closed. And now I will turn the call back to Julia.

Thanks, Tom. Before we open the call to your questions I would like to close with the following remarks. We have reached a very significant milestone, selling all of the Company-owned restaurants and are a step closer to achieving our strategic goal of being a pure play franchisor. Our business model is unique in the casual and full service restaurant category.

And despite the challenging economic environment, we have never wavered from our disciplined strategy to refranchise the Company restaurants, improve our G&A profile, generate significant free cash flow and substantially reduce our debt. I'm very pleased with our accomplishments and excited about the next chapter of our Company. Now Tom and I would be pleased to answer your questions. Operator?

(Operator Instructions). John Ivankoe, JPMorgan.

The question is on the capital structure, if I can, and just a couple of different points. At what level -- I mean of debt to EBITDA of your leverage ratios as you talk about it -- do you think you no longer have two pay off debt with your free cash flow, maybe some more money can be returned to equity holders?

And kind of in that context, I mean now that you have obviously reached a major milestone, and congratulations to that, to what extent is refinancing the entire facility possible, especially on the bond side?

Let me answer the first part of that question; I will let Tom answer the second part. We are going to stay -- hold true to what we have been saying all along, which is that we are going to continue to pay down debt at least for the balance of this year. We said that in 2013 we'd get a 4 on the leverage ratio, which we will; we will certainly come back and talk to the investment community about what is next. But I think at this point, at least for the balance of the year, that is going to remain our focus. I will let Tom speak to the refi.

Yes, and really, I mean we are continuously evaluating our options there. We are always looking at that and looking for opportunities to lower our borrowing cost on an ongoing basis.

And, Julia, if I may, if I am still on, you have obviously kind of again achieved something that you set out to do five years ago I guess it is now in terms of getting to 100% franchised. And it seems like the shared services model -- I mean, it is probably more prevalent across the two brands than even maybe we contemplated several years ago.

So the question therefore is to what extent is an acquisition on the top of your mind? I mean what milestones do you think you might need to kind of achieve at the IHOP and Applebee's level before you guys really think about putting a third business into what you currently have?

Well, like I have always said, it is less about an acquisition and it is more about what is the right structure for us. And I think 2013 is the perfect time to sit down with the investment community, talk about all of our options and what the future might look like. I really want to get to 2013 and finish up this year.

It will take the next couple of months to execute everything that we've said, pay down some additional debt and be in a really good position in 2013. But you are right to say all the options are on the table. We have done some of these before; we will take a look at it again.

But it is probably premature to say anything at this point, but we certainly will look at all that and we made a commitment -- didn't say what date, but we definitely said in 2013 we would get back to you and tell you what the future looked like. Just let us get through the balance of this year, but we promise we will be back to you in 2013.

Understood, thank you.

Michael Kelter, Goldman Sachs.

I guess first off I was curious, you mentioned a new ad campaign for IHOP that launched in May. Did the sales trajectory of the brand improve? Were comps positive in June?

Comps positive in June? No, they were slightly negative. It is going to take more than just a new advertising campaign, Michael. We have to do some substantial work to the menu and that's -- I mean clearly it all works together. We demonstrated before that when you've got advertising and remodeled restaurants and better operations and improved menu, creativity, innovation it all comes together. But it is going to take more than just the ad campaign.

I am pleased with the ad campaign results. The new messaging in my opinion is doing a great job of positioning us differently, but it does take time.

And then the G&A run rate, I know you said you were going to give more formal guidance later in the year, but just on the G&A line item specifically, since there are a lot of moving parts. Between the three most recent re-franchisings you announced in aggregate $5.5 million of savings from the G&A line and now $10 million to $12 million additional from the restructuring. So if we were running at about $155 million before, should we assume $140 million or lower given the various things? Or am I missing something?

You got to separate out the two things on G&A. One has to do with re-franchising; one has to do with the reorganization.

What we have said is we expect to achieve $10 million to $12 million worth of annualized savings for all G&A initiatives combined.

So the $10 million to $12 million includes the $5.5 million that you announced with each of the different -- the latest three re-franchisings you had announced $1.3 million of savings, then $1.6 million, then $2.6 million. So does this $10 million to $12 million include that or this $10 million to $12 million is in addition to that?

No, it includes that.

Got it, okay, I misunderstood. And then on the G&A, could you maybe give a little more granularity as to what the 100 people that are going to be exiting, like what they were doing before, why you don't need them anymore? Just trying to -- want to get an understanding of where there is room to cut and make sure that we are not cutting into muscle.

So of the 100 or so that we are cutting, about half or so are due to the sale of the 65 restaurants in Michigan, so they are largely field people above store, that is the way you should think about it or the left of the remainder of people who specifically work only on Company operations. So that is about half of it related to Michigan.

A few people, as I think I have said probably over the last couple of years, tale related. So they're people who go after the sale of the restaurants. And then the remainder are people throughout the organization where there might have been redundancy or two people doing the same job.

We had an opportunity to create shared services. Think of it that way as really adding value and, frankly, when you do that you put a more senior person in charge and you get the best of both worlds for the brand. So the franchisees really, really benefit from that because they get sort of the best at the senior level and then we have more junior people that stay in both brands.

And one last one if I can. I wanted to ask about unit growth given now that you have really evolved to just a franchise model, that is one of the biggest levers that at least I can think of to get the P&L moving up and to the right.

And when I look at where things are at right now, Applebee's, there has been no unit growth year to date; there are as many closings as openings. And IHOP net unit growth this year is eight units year to date in the first half of the year versus 20 to 25 at this point in the year each of the prior couple of years.

Is there any reason to believe that unit growth trajectory is going to start to move in the right direction or is there -- or is there some reason why maybe you won't see as much unit growth as you had in the past?

So, you have to answer that two separate ways. On the IHOP side, since 2003 we have been developing anywhere between 40 and 60 restaurants a year, the franchise community has. No reason to believe that will be any different this year.

If you look back the last several years the second half of the year always has considerably more growth than the first half of the year, it is the nature of the beast, we are no different really than any other restaurant company. So I don't really see that as a problem, franchisees continue to feel good about the development plan and what they have committed to on the IHOP side.

On the Applebee's side, to refresh your memory, when we made the acquisition, we never make the acquisition with the assumption that we had to do a lot of development; it was all about reenergizing the brand. Now that we have done that we have begun to speak to franchisees about development and they have begun to be interested again.

Frankly, as I have said repeatedly for the last couple of quarters, the single most important thing at Applebee's is getting the system remodeled -- that is critical. As that comes to completion and will be done, as you know, by some early part of 2014 or middle of 2014, we've begun speaking to the 38 or so domestic franchisees about the plausibility of development and they have began to show an interest.

We have begun to do the modeling work to look at that by area of the country and where there may be development opportunities. But I think that is a ramp up, it doesn't happen overnight. It takes time to build a pipeline, time to sit down with each of the franchisees, but I think you will see more of that in the coming years.

Thank you very much.

Bryan Elliott, Raymond James.

Julia, I just wondered if you could maybe peel back the onion a bit more on the continuing sales weakness at IHOP thinking about day parts and weekend versus weekday. Are we losing some traffic at the core weekday -- or excuse me, weekend breakfast periods? Or is it more in the less robust periods of the week? Could you just give us a better sense of where that softness is concentrated?

Yes, I wish it were that simple. I wish I could tell you if we could just fix sales on Friday everything would be great. There is a fundamental issue with the menu has too many items on it, it is too difficult to execute and the consumer has told us loud and clear we have to work on value engineering that menu, because some of the items have gotten too expensive, you can see a direct correlation between price increases and traffic decline.

So we have to work on value engineering that menu quickly and making it viable for all guests whether they are oriented toward value or not. The guests in general are telling us it is just -- it has gotten expensive at IHOP. And we recognize that and we are working as fast as humanly possible on value engineering that menu.

And if you think about what can I point to, think about Applebee's and the kinds of work we have done the last couple of years to value engineer those products so that the franchisee makes money and the guest sees it as a value oriented product that is a wow. So we have to do both at the same time and we are working triple time and testing quickly with the franchise community, which is very open-minded to doing what we need to do to transform that.

That I think has more fundamental play than any single thing I can do at IHOP. The advertising is resonating extremely well; we test ourselves against people outside of even our category and do well.

Feel good about the remodel and the work we have done, feel good about the development, but at the core we have got to fix this menu and its orientation towards value; it is just not strong enough for the average consumer. And frankly, it is too big of a menu. So we have to do both and that is the work that we are doing.

Great, thanks.

Will Slabaugh, Stephens Inc.

I wanted to ask more broadly about IHOP. Just wondering if we should expect more significant changes there before you actually hire a new leader. Or would you think that minor tweaks until a new concept head comes in would make more sense?

The reality is I have been involved for the last several months on the marketing side and we have a very specific plan that we are executing against. So I think my involvement right now is critical to finish that work on the menu, the reengineering, the work we are doing on advertising, working with the franchisees.

So I will say think of me very involved for the next -- at least the next several months to get through this execution of what I think is a very critical portion of the plan and my direct involvement is important. I think that's the reality.

Having said that, I would tell you that we have -- I have great confidence in the depth of IHOP's management team, they are doing a terrific, terrific job and the plan is there. I think my involvement will only may faster and better.

Makes sense. And then on the new marketing strategy that you mentioned earlier at IHOP, last quarter you talked about this earlier in your comments. Clearly a work in progress but that you may have some new data around that, about how it is been resonating with the guests. I didn't know if you happened to have any of that at your fingertips?

The advertising?

Right, [running a] new marketing strategy at IHOP and how it has been resonating with guests.

Yes, it is all proprietary research. Most everybody in the category who is large enough, either in casual dining or family dining or fast food, does a fair amount of testing and they actually go -- you would know it as literally showing people in focus groups in a fairly large way these commercials in rotation with a bunch of other commercials that have nothing to do with restaurants.

And our recall, intent to visit, likelihood to visit, the food -- everything about our Applebee's commercials -- and we are just doing that testing, by the way, on Applebee's -- has been off the chart, by far the best scores that we have ever received at IHOP since I have been involved. So I feel really, really good about that. It is just not enough to necessarily turn interest into visit because we have got to work on that menu.

So I feel really good about the brand positioning work, but anybody in the ad business will tell you, that in and of itself isn't enough. I've got to give people a reason and that is that menu work that we are moving as fast as humanly possible on.

Franchisees have been terrific about volunteering to do testing. But you've got to do enough testing to make sure you are not going down a wrong path. So we have been doing more testing I think in the last 60 to 90 days and for the balance of this year and early into next year than we have done in a long time. So it is good work but it is just too soon.

Makes sense. And just lastly a quick housekeeping question. You mentioned check was higher at both concepts. I wonder if you could talk about how much of that was price versus mix? And then on the mix front what the customers are actually moving toward?

Both chains -- while Applebee's is more of mix it's a little less on average check, traffic was basically flat. On the IHOP side it has been more pricing and less mix and then traffic is slightly negative. So we have a real opportunity there on both brands.

Thank you.

Peter Saleh, Telsey Advisory Group.

I was hoping you guys would give us a little bit of color on what you are thinking for commodities over the next maybe six to 12 months. I know it doesn't necessarily impact the bottom line all that much, but just your thoughts on where commodities should be trending and how things have changed maybe in your conversations over the past couple of weeks or months.

Well, like we say, we read the same things that you do and all indicators are that they are headed upward. In terms of exactly the amount of it we don't really know exactly. But our expectations would be similar to what other people's are. Clearly there is a lot of news around the drought and the impact on commodity supply and I don't think we have anything particularly unique to add to that dialogue. We expect them to go up, how much exactly we don't know.

Do you expect I guess franchisees to be a little bit more aggressive getting ahead of the inflation with some more pricing over the next I guess quarter or two?

So I think the right way to say it from a -- what we said to you last quarter was that we felt that franchisees could price with inflation, certainly at Applebee's continue to believe that, no reason not to. And at IHOP we have seen -- and by the way that inflation for Applebee's I think we said -- at the beginning of the year we said was somewhere around 4% or 5% inflation and we said that at the beginning of the year, that is for 2012.

There is a lot of confidence that franchisees can price with inflation. And if you recall, we said IHOP could be slightly up I think we said flat to 1% at the beginning of the year and that is looking like the case. Now the drought in the last couple of weeks, who knows. I mean I can't predict the future, but it concerns everybody.

What is interesting is in addition to that reality if you think about it, when we made the acquisition in late 2007 there were 56 distribution centers in the domestic US. Today we've gotten down to 36 and the goal is to be at 29 by the end of the year. Every time you consolidate a distribution centers that put real money in the pockets of franchisees who have that consolidation.

So we are hoping that some of this consolidation of DCs offsets anything that may happen. But pricing absolutely on the Applebee's sides, more problematic on the IHOP side, but the good news is they are reversing their trend. Last year IHOP had a higher forecast for increases, this year it is more flat. So the good news is they shouldn't have to price right now unless there is something dramatic that comes of this drought that I just -- I can't predict.

Great, thank you.

Reza Vahabzadeh, Barclays.

So I'm sorry, I missed the same-store sales metrics on Applebee's. You said traffic and mix were both flat including check?

Let's see, I said mix was slightly up, average check was slightly up and traffic was basically flat at Applebee's. And on the IHOP side I said traffic was down, average check was slightly up and I don't really have a mix on the -- I'm guessing on mix I don't really know that much on the mix side.

Got it. So for Applebee's you were obviously going -- lapping against some strong numbers last year in the second quarter. What do you think worked for you in the quarter given that the economy and the (inaudible) environment, and what do you think wasn't working as well as you would have liked it?

Are you talking about this last quarter?

Yes, second quarter, yes, for Applebee's.

Yes, there is no question that the economic headwinds definitely hurt us, especially at Applebee's. I mean it has been an interesting lumpy bumpy time. But I think the work that we are doing at Applebee's I feel very good about, like differentiating ourselves, new and innovative programs, real price value -- we just need more of it. I don't think there is anything I would necessarily change, the remodel is resonating. I mean we are kind of working on all cylinders, but we definitely hit an economic headwind.

Right. And would you anticipate the competitive intensity to pick up just given the slowdown or about the same?

Everybody always asks me about the competitive set and I always say I worry about the things I can control. I don't see anything on the competitive set that particularly concerns me against Applebee's. I think there is a lot of same-same going on. Virtually everyone in the category has stolen the 2 for $20 -- I guess I should feel like a complement to that.

But virtually everyone is doing some version of 2 for $20, virtually everyone is trying to do value. I think our whole notion is how do we step out and differentiate ourselves. And that is really the work that we are maniacally focused on at Applebee's on lunch, dinner and late night. Very focused on those three distinguishing day parts and what we are going to do differently.

There, if you recall Bryan's question earlier on the IHOP side, I think it is less about segments. I think it's much more about segments on the Applebee's casual dining side. We have got to distinguish ourselves at every day part and that has sort of been our maniacal focus.

Right. On the IHOP side, when do you think you can be in a position to roll out both a new menu with the appropriate value engineering and the rationalization as well as the new marketing campaign? Can that take place sometime this year?

Yes, the way you should think about it, and I may not have been as clear in my script as I would have liked to have been. But I tried to say maybe not so subtly I can't do it all at once, it is physically impossible. There is 185 menu items at IHOP and 365 franchisees; it won't work that way, so we are going to do it in pieces and parts.

So you are going to see continual evolution of the menu for the next 18 to 24 months. Every time you go in an IHOP from now until certainly the end of 2013, you will see ongoing changes by section. I just -- it is too much work, it's too overwhelming.

Frankly, forget even our team members and franchisees; it is to overwhelming for the guest. I have to do it category by category. And we have some very specific proprietary research which has told us to go in a certain direction first and then we can get to some of the other areas.

But there are of some particular concern some of the items on the menu, so we are focusing there first and then we will get throughout. So think of us -- you will see some featured menu items on those handouts in third and fourth quarter this year, then you will start to see the evolution in engineering starting at the beginning of 2013.

And right now we have scheduled at least three menus in 2013 trying to do this programmatic work. And frankly we did the exact same thing at Applebee's and learned too much to do it all at once, but if you do it in sections it's doable from an execution standpoint and it is doable with the franchisees and guests like it that way, it is not overwhelming.

One housekeeping item. As far as the improvement in Company store margins, how much of that was due to refranchising and lower depreciation as opposed to organic improvement?

We are looking that up -- while he is looking I will talk. I do know historically there have been highs and lows on that, so he is looking at what it was in second quarter.

Yes, so, about 0.5% of the difference between them is basically restaurant mix. In other words, the ones that we have left are more profitable than the ones that were refranchised and a little less than 2.8% is really related to cost performance.

Got it, thank you.

Bryan Hunt, Wells Fargo Securities.

Good morning, this is [Kevin McClure] in for Bryan. Our questions have been answered. Thank you.

Carla Casella, JPMorgan.

This is Paul Simenauer on for Carla Casella. I just wanted to ask you some follow-up questions on what your capital structure. First, I was just wondering what your target leverage was. I think you mentioned you were hoping to get down to 4 times. I just wanted to see about where you are kind of like targeting (technical difficulty) capital structure.

No, we have never issued a target structure. We just said in 2013 we will have a 4 on our leverage ratio and at that time we will go back to the investment community and have rethought all of the alternatives open to us in the capital structure and be more in a position to share. But we have actually never given a target number.

And then just a follow-up to that, just could you just maybe walk me through how you get to 4?

Well you just -- it's a free cash flow and where we are in debt right today.

And we expect to get to 4.X in 2013 not 4.0.

Yes, we never said -- we just said it would have a 4 on it.

We don't have a target, the proceeds of the refranchising then -- our ongoing free cash flow --.

The way to think about it is two things -- it's the proceeds that we are getting out of these transactions, right, as well as just ongoing free cash flow. If you add those two things up you just at some point in 2013 get to a 4 in front of your leverage ratio.

But we don't have a target.

No.

That's very helpful; thank you very much.

Jeff Farmer, Wells Fargo.

I do realize it has been less than a month since you introduced the See You Tomorrow campaign, but in your early feedback that you have seen in the month that it has been out there or even from the testing perspective anything you are willing to share with us?

We have definitely seen that the message is resonating with guests. People like the new advertising. Have you seen it yourself?

I have, yes.

Yes, I think the food photography that we are doing at Applebee's is some of the finest food photography -- I also think IHOP -- that is some of the best food photography both brands have ever, ever, ever done. It is fabulous. I think it is definitely resonating.

It does take time. Just like I said on the IHOP messaging, we are just now in testing, doing some of the same testing. we have a little bit of a lead on it. As you know, we started in May at IHOP and have already gotten our results back. On the Applebee's side, it is a work in progress. Certainly early results indicate it is just resonating with guests. But to the degree that takes time and I think all of the other work that we are doing in combination with that is where it really takes hold.

And then just a couple more questions. So really in anticipation of introducing the new campaign in early July, had you essentially gone dark on national TV for several weeks or even longer than that? I didn't pick that up. I was just curious if there was a situation where you might have even faced a greater same-store sales headwind if you did go dark (inaudible)?

No.

Okay.

No, both brands switched agencies and when they switched agencies they literally -- remember that is just the creative. But both brands use the same media buying service and we just kept our media buy in play with no ostensible changes. So I think both brands went, and have historically, there is a couple of weeks during the year they go dark, but there wasn't anything unique.

We, literally, because we had that -- the campaign was new, but we had other stuff in the can and we ran it. So there was nothing that -- we didn't sort of miss a beat, if you will.

Okay. And then just sticking with Applebee's, how many times a year are you updating the two for $20 or refreshing the two for $20 menu? And what historically has been the impact on either the mix or the sales component for it?

It has historically been at least a couple times a year, maybe two times a year where we advertise it, but we also change it in-store and don't necessarily advertise it. So it is at least a couple of times a year where we actually update it for new items. Historically, the mix has been anywhere between 17% and 20% mix, and then when we go on advertising we usually get a little bump out of it in terms of mix.

Okay. And then just final question, really on the remodel. So I think you have 100-plus year to date in 2012 and I understand the nice sort of a same-store sales tailwind that would be derived from that. But if we go back to last year, looking at my numbers, there is roughly 353 remodels completed in 2011 throughout the year.

Is it fair to say that that group of remodeled restaurants is still delivering a nice same-store sales number, sort of above and beyond the system average? Are you still sort of getting an incremental lift on the comp relative to the rest of the base that had not been remodeled?

Great question. We spent a fair amount of time talking about this. You sort of hit the reset button after the first year of a remodel and then you go back to it -- its new average and then from that you've got to start all over with trying to get comp sales. Does that make sense?

It does. And then I sort of lied to you -- maybe just one more sneak in on IHOP. So sounds like the 7 for $7 menu, that that thing has got limited lifespan moving forward. That's the type of stuff you are going to attract. Obviously that was your initial foray into that deeper or more called out value or over value -- it sounds like that is not resonating the way you had expected it to. So some other variation of a value menu we should expect sometime -- would it be early as 2012 or get into 2013?

I think you should -- the way you should think about this is the first part of your comment is spare, 7 for $7 didn't resonate with all guests. What you should be thinking about is at the end of this year and all throughout 2013 you should be thinking about new value propositions and when I said earlier we were testing, that is the kind of stuff we are testing. So you should think of indefinitely IHOP being able to, either by section of the menu or featured menu item or what is on television, to have a value proposition inherent to it.

Okay, thank you very much.

(Operator Instructions). David Kuritsky, Apollo.

Just wanted to see what availability you have under the revolver. I know there are some letters of credit outstanding. Can you just refresh us on that?

Where are we on the revolver?

Total amount, $75 million.

Is all of that available to us now?

Where we were at the end of June, I don't know what we were as of last week.

The $75 million revolver, we are checking to see exactly the amount that is available to us today. Can you give us a second?

No problem.

I think as of now it is all paid down.

I do too. I thought it --.

Yes. It is.

It is. Okay, so all $75 million is available.

All right, thank you.

We will check that though.

Yes. If there is an issue we will let you know. Okay, Operator, any other questions?

There are no further questions from the listening audience at this time, ma'am.

Thanks, Tony. Thank you all very much for joining us. Our third-quarter 2012 reporting date is October 30, 2012. If you have any questions in the meantime feel free to call Ken, Tom or myself and thanks again for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a great week.