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DineEquity Inc. (NYSE:DIN)

Q4 2008 Earnings Call

February 25, 2009; 11:00 am ET

Executive

Julia Stewart - Chairman and Chief Executive Officer

Jack Tierney - Chief Financial Officer

Gregg Kalvin - Corporate Controller

Stacy Roughan - Director of Investor Relations

Analyst

Chris O’Cull - SunTrust Bank

Bryan Elliott - Raymond James

Steven Rees - J.P. Morgan

Michael Gallo - CLK

Tom Forte - Telsey Advisory Group

[Chris Sipple] - Blueline Capital

Operator

Ladies and gentlemen, welcome to the fourth quarter 2008 DineEquity conference call. My name is Tania and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of this conference (Operator Instructions).

I’d now like to turn the presentation over to your host for today’s call, Ms. Stacy Roughan. Miss Roughan, please proceed.

Stacy Roughan

Good morning and thank you for participating on DineEquity’s fourth quarter 2008 and 2009 performance guidance conference call. Today with us from management are Julia Stewart, Chairman and CEO; Jack Tierney, CFO and Gregg Kalvin, Corporate Controller. Before I turn the call over to management, let me remind you of our Safe Harbor regarding forward-looking information.

Today management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors which may cause the actual 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 releases, as well as in our most recent 10-Q and 10-K filings with the Securities and Exchange Commission. In addition, DineEquity disclaims any intent or obligation to update these forward-looking statements.

In conjunction with our prepared remarks today, we have provided additional information on our IR website at www.dineequity.com for your viewing. The document can be found under the Calls and Presentations section of the IR site, posted as supporting materials for today’s webcast. If you haven’t already done so, we encourage you to download the presentation.

Additionally on this call we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our news releases today which are also available on our IR site.

Now I’d like to turn the call over to Julia Stewart.

Julia Stewart

Thanks Stacy and good morning everyone. Today we’ll provide you with a quick overview of our fourth quarter and fiscal 2008 results, update you on where we stand with regard to selling Applebee’s company operated restaurants and then finish up with the discussion and the steps we’ve taken to ensure our financial flexibility, but first I would like to welcome Jack Tierney to DineEquity.

For the past three decades, Jack has served in a variety of senior finance role, including Chief Financial Officer, Controller and Chief Accounting Officer for both domestic and international companies most recently serving as the CFO of The Dial Corporation.

We are pleased that we have been able to attract a CFO with Jack’s qualification and believe his extensive experience across several industries will benefit the company and our shareholders in the years ahead.

Jack Tierney

Thank you, Julia. I’m glad to be here and I look forward to getting to know our investors and working with the teams at DineEquity, Applebee’s and IHOP, as we achieve our goals in 2009.

Julia Stewart

Now, since Jack just joined DineEquity three days ago. We figured we’d give him a break and we’d ask Gregg to lead our financial discussion today. Gregg and I want to take this opportunity and I want to say thank you personal for a great job you’ve done acting as a CFO over the past months. We didn’t miss a beat and that’s thanks to you and your entire self dedication in seamlessly continuing to support our finance and accounting activities. Thank you.

Now, let’s start by covering some of our key performance statures for the fourth quarter and full year 2008. Now, starting with same-store sales, the fourth quarter was a challenging time for IHOP and Applebee’s. The sharp pullback and consumer spending, which began in the third quarter continue to be a dominant factor for both brands in the fourth quarter 2008.

IHOP system-wide, same-store sales performance turned negative decreasing 1% for the fourth quarter 2008, compared to the same quarter last year. We were very pleased to continue our track record of positive annual same-store sales with our sixth consecutive year of growth with the 1.5% increase for the full year 2008.

Our performance for the quarter was particularly challenged by a difficult comparison to the prior year’s strong quarterly growth of 3.7% in 2007. National media weights were also lower in the fourth quarter primarily due to the prioritized advertising around IHOP 50 celebration, Discover America Pancakes during the summer month.

However IHOP entered 2009 with an exceptional value message “all you can eat pancakes” and we are encouraged with the results today. Also some of you maybe familiar with the links to which IHOP’s closest competitor has gone to focus America on curious breakfast and if you’ll indulge me for a moment, we want to thank them.

The day this competitor gave away breakfast, IHOP sales were significantly up that day and continued strong for the remainder of that week. I think this is a terrific example of the fact no matter who talks about breakfast, whether it’s a direct competitor, whether it’s the quick service players, it nearly always is a great thing for IHOP.

Yesterday, we celebrated our fourth annual National Pancake Day with our charitable partner Children’s Miracle Network. I’m so proud of the National Pancake Day because it is more than just a day of giving away our terrific signature pancake; it’s about supporting a great charitable cause and giving back to the community.

Our franchisees rally around it and we delivered value to our guest and make them feel good about being a part of it. That’s how IHOP makes it different and that’s how we will continue to leave the category. I can’t wait to share the results with you. We got preliminary result maybe an hour ago that said we were substantially up in traffic versus a year ago, but we’ll know more here and I promise to get something out to you shortly.

Turning now to Applebee’s; Applebee’s system-wide domestic same-store sales decreased 4.6% for the fourth quarter of 2008, compared to the same quarter last year. Applebee’s marketing efforts during the quarter included an enhanced value offering to tow for twenty supported by national advertising, a holiday gift card promotion program and the continuation of Applebee’s if the whole new neighborhood campaign. Applebee’s ended 2008 with same-store sales that decreased 2.2% for the full year relatively inline with our expectation.

Turning now to Applebee’s company operations performance; by focusing on our restaurant level profit performance initiative, we significantly increased our profitability during the quarter by delivering a 280 basis point improvement in operating margin. Applebee’s operating margin of 10.7% for the quarter was primarily driven by improvement in the management of labor expense and food and beverage cost which more than offset higher commodity and utility cost.

We also met our full year expectations of improving margin performance and in 2008 with a 120 basis points increase to 11.7% operating margin excluding pre-opening expense. Approximately, 110 basis point of this gain resulted from purchase price allocation adjustment primarily favorable depreciation expense.

Earlier this month, we were pleased to meet a significant milestone with the successful formation of a purchasing collaborative for the Applebee’s and IHOP system. It’s the first of that kind of both causal and family dining and was made possible as a direct result of the Applebee’s acquisition. It was also a true collaborative effort and I want to acknowledge our franchisees and the team responsible for making it happened.

The Co-Op will now manage the procurement of goods for 3400 franchise and company operated restaurants for both brands and it’s currently projected to deliver 3% to 5% in cost savings to our franchisees over the next several years. Including the favorable impact of the Co-Op, we expect commodity cost increases for both Applebee’s and IHOP to be under 3% for 2009.

Turning now to re-franchising, I’m pleased to report that we successfully closed transactions for the sale of 103 restaurants over the past year with the Texas market that closed in the fourth quarter of 2008. In addition, this week we closed five of the seven restaurants in Albuquerque slated for sale for a total of 108 restaurants sold.

We’re pleased to see these restaurants in the hands of experience restaurants operators. They bring a true owner/operator mentality to the table and are committed to our brand revitalization efforts underway and ways that we believe will lead to a higher level of performance in these markets.

We generated approximately $61 million in after tax cash proceeds from the sale of 108 Applebee’s company restaurants in Texas, New Mexico, Nevada, Southern California and Delaware which have been dedicated to consolidated funded debt reduction. Additionally, we had successfully assigned approximately $50 million worth of sale-leaseback related rental obligation as part of these transactions. That’s a total of $111 million of de-leveraging progress enabled by our re-franchising efforts.

With that, I’d like to turn the call over to Gregg Kalvin.

Gregg Kalvin

Thanks, Julia and good morning everyone. Let me first quickly walk through key performing highlights for the fourth quarter and fiscal 2008 and then touch on our de-leveraging process. EPS for the quarter was impacted by a non-cash impairment charge of $171 million, primarily associated with write downs of goodwill and intangible assets related to the Applebee’s acquisition.

In the fourth quarter of 2008, we completed our annual test for impairment of goodwill and definite life to intangible assets. Our analysis concluded the fair value of our IHOP and Applebee’s franchise reporting units exceeded the net carrying value. However, the fair value of the assets assigned to the Applebee’s company operator reporting units was less than the carrying value. We then estimated the fair value of all of the assets and liability to the company unit as it had been acquired with business combination.

The result of that process was a goodwill charge of $114 million for the quarter, representing 100% of goodwill of the company units. In addition, we recorded an impairment charge of approximately $44 million related to the definite life intangible assets. Specifically, a portion of the trade name allocated to the Applebee’s company unit, again these were all non-cash charges.

Excluding these charges, we were pleased to turn in not only a profitable fourth quarter, but also a profitable bottom line performance for the first full year after acquiring Applebee’s. Turning to an important operating level in our business G&A.

Consolidated G&A increased to $182 million, reflecting a full year of overhead expense at Applebee’s. This also comes in nearly $4 million betted in our previous guidance for 2008 due to discipline expense management. Consolidated G&A included approximately $12 million in non-cash stock compensation expense and $8.5 million with retention in severance related payments for the full year.

Looking at our income taxes, our effective tax rate fourth quarter was approximately 13%. This is better than the third quarter level of 21% primarily due to the decrease in our pre-taxable income. This was partially offset by impairment of non-deductible goodwill. Also I would like to remind you that our tax rate will be highly variable as long as we are selling company operated Applebee’s restaurants.

Moving to our cash performance; consolidated cash from operating activities was $111 million for the full year 2008, a 4% increase versus the same period last year. This level of cash generation was higher than our previous guidance primarily due to greater than expected one-time tax refunds related to the Applebee’s acquisition received in late 2008 as well as higher than expected net gift card benefit from the fourth quarter.

The IHOP business generated $60 million of cash from the structural runoff of principal payments related to its long-term notes receivable for 2008. During the same period, consolidated capital expenditures came in at low end of our expectation at $32 million as compared to the same period last year.

This level of spending was primarily related to the capital needs of Applebee’s company-operated restaurants and final construction expenditures on Applebee’s Restaurant Support Center in Lenexa, Kansas recognized earlier in 2008.

These factors produced consolidated free cash flow of approximately $95 million for 2008 which we define as cash from operating activities plus the receivables runoff less capital expenditures. In fiscal 2008, we utilized available free cash flow to retire approximately $59 million in consolidated funded debt purchased. Additionally use of the free cash flow during 2008 included the payment of our common and preferred dividend.

Through a combination of re-franchising proceeds, sale leaseback and operating lease rental segment, the use of free cash flow to retire debt along with retirement of short-term debt DineEquity has reduced its leverage by approximately $500 million in fiscal 2008.

Now turning to our debt ratios; our consolidated leverage ratio as of the end of the fourth quarter was 6.77 times. Our leverage ratio benefited from the retirement of debt purchased opportunistically. Our debt service coverage ratios or DSCRs were three times for IHOP securitization on a three month unadjusted basis and tow times for the Applebee’s securitization on a three month adjusted basis. Both our leverage ratio in DSCRs remain comfortable in compliance with our covenants.

Now I’ll turn the call back to Julia.

Julia Stewart

Thanks, Gregg. I want to expand on our debt covenant discussion. We expect to remain in compliance with our debt covenants based on our current plans. However, we’ve taken proactive steps to address those things within our control to ensure maximum financial flexibility going forward. We’ve already taken action on approximately $20 million worth of profit enhancements we detailed last quarter.

Each $7 million of increased EBTIDA represents an approximate 10 basis points of improvement and our leverage tax. We are making material progress towards achieving the $50 million in cost savings target at the time of the acquisition. By the end of 2009, we expect to realize to approximately $35 million in total G&A savings garnered in 2007, 2008 and 2009 as a result of our successful re-franchising and integration effort.

These actions bring our 2009 expected G&A expenses into the range of $165 million to $175 million for 2009. So, we’ve leveraged our core competency around disciplined G&A management making great progress on the expense control front, which is an important contributor to our financial flexibility in the future.

We’ve also made terrific strides in bringing CapEx spending inline with our combined franchised businesses and expect expenditures to range between $13 million and $16 million in 2009. This gives us to a level of capital spending originally targeted for 2011, our full two years earlier that our expectation while allowing for a generous amount of maintenance CapEx to service our remaining company restaurants as needed.

To other guidance metrics for 2009, we expect cash flow based depreciation and amortization to be approximately $100 million this year and consolidated interest expense is expected to range between $190 million and $200 million in 2009 approximately $40 million of which will be non-cash.

Due to the strength of the Applebee’s and IHOP franchise system, DineEquity generates a significant amount of cash each year to meet our obligation and comfortably run our business. We expect to generate excess free cash flow in the range of $99 million to $112 million in 2009. We expect to allocate a portion of excess cash towards opportunistic debt retirement, which we believe is a prudent step that is expected to maximize our financial flexibility and create value for shareholder over the long term.

We continue to have active negotiations for all of Applebee’s company operated markets available for sale with different parties, with restaurant background and operating capabilities. We continue to believe that our 2009 re-franchising goals of selling approximately 200 restaurant is achievable.

However, we do recognize that closing deals is very difficult in the current environment and are working with several interested parties to overcome obstacle posed by the credit market and weakness in the broader economy.

With these proactive steps and by executing our plan for 2009 we believe we’ll remain in compliance with our debt covenant. We also understand the sensitivities inherent in our business model and the action we can take to remain in compliance to the economy environment deteriorate, but beyond what we contemplate in our in our 2009 operating plan.

We have maximized our financial flexibility in a prudent way and are now focused on moving forward in 2009, executing our strategic agenda for the Applebee’s and IHOP brands. We are an experienced franchise or restaurant with the proven expertise in revitalizing and optimizing brands.

This is what we’re good at and we plan to stick to our nettings to drive our business forward and meet our commitments in 2009, despite economic challenges. We did just that in 2008 and we plan to do the same again in 2009.

For IHOP we expect system-wide, same-store sales to range between positive 1% and negative 1% for fiscal 2009. This outlook takes into account a continuing challenging consumer spending environment, which is expected to be tampered primarily by compelling, value oriented, limited time offers to be introduced throughout the year, enhanced marketing, promotion and media strategies, improved operational execution and a plan system-wide menu update.

Development should materialize at a similar pace to prior years with franchisees and our Florida area licensee expected to open between 65 and 75 new IHOP restaurants in 2009 in the U.S., Mexico and Canada and we’ll employ our services as good as pancakes training platform and AB operator rating systems continue to drive operational improvements at every IHOP restaurant.

Two-thousand-nine promises to be an exciting year for Applebee’s. We move into our second year of revitalization effort, which will improve the rollout of new menu items throughout the year, the strategic use of promoted value offerings, a focus on improved operations execution of the restaurant level and enhanced marketing and media strategies.

These brand and operational revitalization effort are an important next step to begin to engage the guest and compete more effectively in this challenging consumer environment.

Spinning the results of this initiative and taking into account strong consumer headwind, we expect Applebee’s domestic system-wide and company same-store sales performance to range between negative 2% to negative 5% for fiscal 2009. While we are primarily focused on enhancing the performance of existing restaurants, we expect franchises to open between 30 and 40 new Applebee’s restaurants in 2009. Approximately, half of which are expected to be developed in the U.S. and the balance internationally.

Margin improvement at company restaurants will also be in area as intense focused. We expect to deliver approximately 50 to 150 basis points of margin improvement for the fully year 2009 by employing even greater management focus on cost control. Importantly, we believe we can achieve this without impacting guest satisfaction, which we successfully demonstrated as possible, based on our improved guest satisfaction for us in 2008.

Finally, our system-wide effort to improve the operational performance of every Applebee’s restaurant will be critical as we look to improve guest satisfaction. We expect to accomplish this through the utilization of an AB operator rating system. Implemented in the fourth quarter last year, similar to the one employed within the IHOP system.

Additionally, our focus on ensuring that every guest leaves happy will be a central effort at company and franchised restaurants throughout the year. We experience a significant improvement across all key consumer measurements in 2008 and want to continue that momentum. In all, I’m proud of that progress we’re making in revitalizing and restructuring the Applebee’s business.

We have a strong management team in place, a tireless employee base and franchisees who are dedicated to our vision of becoming number one in Grill and Bar. The resilient sustainable momentum present within the IHOP system remains a testament to what an organization can achieve, when it executes consistently and passionately towards the vision of becoming number one.

It’s been a little more than a year since we close the acquisition of Applebee’s. The economic environment has certainly changed and is undoubtedly a challenging one. Despite that, we delivered on our key commitments for 2008, most notably in regards to our re-franchising goals and exceeding our guidance on fiscal metrics by cash from operations, G&A and CapEx spending, while taking steps to opportunistically reduce our debt levels.

We will continue to suffered in 2009, by focusing on those things we can control while remaining dedicated to our strategic growth agendas for both Applebee’s and IHOP. I believe, we are in a strong position entering the year and look forward to an even greater level of performance in 2009.

With that we’ll be happy to answer any of your questions you might have. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris O’Cull - SunTrust Bank.

Chris O’Cull - SunTrust Bank

I have a couple of questions, I may have missed this in the presentation Julia, but when does Applebee’s going to launched some of these new products?

Julia Stewart

Well, I said, throughout the year, you’ll see the new menu in April and you will see the items throughout the year. So, not to be giving trade secrets just think of it throughout the year and the new menu if you want to see something actually, like when you go into a restaurant what’s different shout for April and we will get something out in the press release form in mid April to let you know exactly when they go in, but you will see new food and new beverages come April and then throughout the year, you’ll start seeing us advertise new product.

Chris O’Cull - SunTrust Bank

Where the new products that are advertised will they be on that new menu or will they be as extension or some of things on the new menu?

Julia Stewart

Both, some of them will be on the new menu and some of them are, think of it as a surprise.

Chris O’Cull - SunTrust Bank

Okay, great and then will there be new product platforms, I mean new categories?

Julia Stewart

Yes, you may not see all of that in ’09, but you will see some of that in ’09 and that will continue frankly for the next several years.

Chris O’Cull - SunTrust Bank

Okay and then second question. Gregg how much of the plan G&A savings for 2009 will be non-cash versus cash?

Gregg Kalvin

Well, we are not going to disclose that right now. I mean, it’s a combination of obviously cash and non-cash item, dependent on how the financial result play out over the year, what levers we have to deal with non-cash payments for certain item if you will. For example like stock-based compensation and things like that.

That could be a significant non-cash item if we choose the pay that way versus in cash for compensation and things like that. So, we don’t have an exact number, but a portion of it could be approximately that. The total stock-based comp and depreciation number for the year will be about $26 million related to G&A. So, a portion of that could be related to those savings.

Chris O’Cull - SunTrust Bank

Okay, I mean so the savings are tied to some of the removable of the depreciation from stores that you re-franchise?

Gregg Kalvin

Yes, absolutely. It’s built into the sales of 200 stores in 2009. The depreciation would be reduced in relation to the production of those stores.

Chris O’Cull - SunTrust Bank

Then lastly and this is question that’s kind of out there, but I was just wondering given that the bonds are trading at a discount, has the company consider having franchisees, buy the bonds at a discount and then use that face value of that bond to pay for some of the Applebee’s stores that they may want to acquire?

Julia Stewart

I think the best answer is to say that the company continues to look at if any and all measures that we might be able to do and certainly that’s something that we are taking into consideration.

Chris O’Cull - SunTrust Bank

Would there be any restrictions from doing that or from taking that approach?

Julia Stewart

I believe there to be. Are you talking about from ours securitization?

Chris O’Cull - SunTrust Bank

Yes.

Julia Stewart

No.

Operator

Your next question comes from Bryan Elliott - Raymond James.

Bryan Elliott - Raymond James

A couple of things, first I guess Julia there seems to be some confusion. Could you remind everyone how long it will be running national Pancake Day and maybe contrast what you do from a collecting donations etc., what Dine’s did, just go through that please.

Julia Stewart

I would be more than happy to, would be my great pleasure. So, this is the fourth year that we’ve really celebrated national Pancake Day in a system-wide event where every single restaurant it participating across the country and what IHOP does is between 7 am and 10 pm yesterday if you walked into IHOP if you ask a free short stack of pancakes and then return we ask you at that front there was about and we asked to make a donation maturity. So, whatever you felt comfortable and giving and so that money every stitch of it get collected this week and then we give all of that the Children’s Miracle Network or a variety other maturity.

The large majority of it goes to Children's Miracle Network and so it’s our way of giving back to the communities for which we serve. So, it’s not just about giving free food if you will its making a different in the communities we served. If I had an hour, I’d share with you some of the letters I get from Children’s Miracle Network and some of the hospitals.

It’s pretty heart-wrenching about saying about saving people live and making it different. It’s really our way of giving back.

Bryan Elliott - Raymond James

Could you maybe compare in contrast sort of, assuming some one buy the coffee or orange juice or side item as to whether you see the franchisees actually generating gross margin versus giving away in entire play the food.

Julia Stewart

Absolutely, they do extremely well. They look at this as an opportunity get back, but lots of people still the large majority if you will still buy a meal and/or multiple meals. It’s just sort of this free to core that you fell good about getting back, its this notion of I want to eat, my family of four doesn’t necessarily want a short stack. So, we absolutely post profitable days.

Bryan Elliott - Raymond James

It was asked earlier by Chirs, maybe help us understand a little better. We had a pretty good margin this year considering sales at Applebee’s and we’re targeting some more savings despite negative comp, so which some times can lead to cutting of some muscle at the store level. Can you give us some help on understand what areas of cost savings are out there given the negative leverage from further comp declines?

Julia Stewart

Sure. Let me give my 50,000 foot view and if Gregg feels like he needs to add more and he can certainly join in. I give all the credit to the operators and certainly to Mike. I think those guys have done a fabulous job Sam, Mike the whole team, and making certain that we are focused on the right thing, no cutting to cutting stake or cutting into the months that you subjected, but really leveraging every single dollar.

So a part of that if you think about the middle of P&L, they’ve done an excellent job on commodity where we really seen some of the commodities come down, they really done a great job of leveraging that. They budgeted better because we know what our calendar is going to be, so they’ve done a nice job of budgeting again that knowing what that futures product is going to cost to us, so they have done a great job in that.

Then in labor and management, some of the things we talked about Brian that we were introducing at the end of last year sort of really taken hold which is making certain that every single dollar from a salary and bonus perspective. We are absolutely maximizing and not to give away too much, but we utilized at the end of last year we put into place, think of it like a labor scheduling system that has really made a different in terms of maximizing the service component, but really minimizing any cost that are unnecessary. They have really looked at every single activity in that restaurant and try to maximize that.

So I’d give them all the credit in the world and they are kind of on a role, but they started at the end of last year and it just has been continuing. I couldn’t be more pleased and to your question earlier they are the first to tell you, we are not kind going to cut into the muscle. They absolutely are not doing that, but more importantly than even that is our guest experience and our results, what they tell us from a service component the speed of it has gone up significantly.

So that’s what I was trying to say in my remarks, it’s pretty remarkable that we’ve done all this cost-cutting, but we’ve been able to actually substantially, not a small amount but substantially increase guest service. It’s about as good as its gets.

Bryan Elliott - Raymond James

That’s helpful. I was just wondering if you could address sort of what impact you might be seeing in the short run at Applebee’s given the two for one deal from Fridays and I guess Ruby recent more recently and whether that’s having any material and sudden impact in traffic?

Julia Stewart

Well, it as you know it just started and when people do crazy things. I’m not certain what the result of the outcome. I think we are so focused on delivering. The guests are substantially enhanced guest experience and the plan that we put in play and I think the franchisees have taken a healthy attitude of “you know what, let’s not get into this price war”.

We’ve seen what happens in fast food, we’ve seen what happens in other categories, so we’ve rather continue under our plan to what we know to be advantageous and what those guys do get our in the free world, but it’s probably too soon, I don’t see an immediate reaction and I don’t see the franchisees saying, let’s go out there and do it. To be honest with you that’s really been the underpinning long before we ever made the acquisition of Applebee’s, its all about their price value, their everyday incredible value.

So, I think really focusing on the everyday low value is what consumers are really holding in on, if you will for Applebee’s and that’s really part of our differentiation. So, it’s a lot like if you will the analogy, excuse for being shameless here, but it’s a little bit like what we saw with IHOP, when everybody decided to get that, had a couple of years ago discounting, we just stayed out of it and said “you know what, we deliver everyday low value, we don’t have to give it away” and that really made a difference.

So, I think that’s clearly our strategy to stay focused on today.

Bryan Elliott - Raymond James

Alright, thank you. Last question need to bloc out 18 hours to tie Brian to his disk. So, when do you think the 10-K will be filed?

Julia Stewart

Today or tomorrow. Thanks Bryan.

Operator

Your next question comes from Steven Rees - J.P. Morgan.

Steven Rees - J.P. Morgan

Good morning, Julia. So just on the same-store sales guidance, looks like the fourth quarter trend at down 4.6 at Applebee’s and down one and IHOP that sort of the low end of the full-year guidance range. Could you just comment on what gives you confidence that things will improve this year, is that the trends you’ve seen year-to-date is at some level of pricing just sort of some more color there?

Julia Stewart

Two things, can we take them separately?

Steven Rees - J.P. Morgan

Sure.

Julia Stewart

So on the IHOP side, certainly we’re onto a good start, we had a very, very valued oriented promotion with All You Can Eat and we’ve seen the free refill coffee in the All You Can Eat. So, we’ve gotten off to a very good start with IHOP and I think secondarily, because we are so far ahead. As you know, where we are working on 2010 and 2011 calendar, we have a really high level of confidence in those items tested or they’ve done well.

I think some as you may have seen we released today, our whole new program that launched with the new loaded country [Inaudible], which I know for some of you its lunch time, but the Ham, Swiss & Mushroom Browns, the [Jack Shutter and baking brown, the country sauce] these are just fabulous item.

So, when you think about throughout the year for IHOP and the kind of value orientation in new items, we have a high comfort level and we’ve got a great track record and those have tested well. So, I think that gives us a lot of solid on the IHOP side, both from a differentiation and then also from a sort of a breakthrough aspect of how we done.

On the Applebee’s side, I think you both got an aggressive calendar throughout the year and this notion of new and new things I think gives us solid confidence. I’m sure this sounds a little bit contrive, but I’m telling you when you talk about substantially increase guest service course and the guest reacting so favorably I think that gives us solid.

Then lastly we happen to think we’ve got the number one marketing person in the country with Becky and I think Becky is adding her own level of expertise to the current existing program, even enhancing it and making it that much better. Frankly, our guidance is being prudent. It’s all of those things combined between IHOP an Applebee’s.

Steven Rees - J.P. Morgan

I guess most of the advertising I’ve seen so far at Applebee’s has at least included some price point like the two for twenty or the 9.99 Stakes, but yet the industry traffic has gotten worse. So, how important or how effective our price points going forward, or do you think thing there is more of an opportunity to say “Hey, look these are the changes that we made” and sort of communicate that.

Julia Stewart

It’s a great question. I genuinely believe it depends on what you are marketing. I think there are some things that truly limit themselves to a price point on television to spring value and I think there are some other things. Especially when you’re talking about new, I refer to that as sort of affected pricing, because it never existed before, you have an opportunity to view what I call effected pricing. So, I think it’s a combination of both and I think you’ll see both this year.

Steven Rees - J.P. Morgan

Then I was surprised more than 280 basis points margin improvement. Gregg maybe you just sort of comment on where exactly that came from to the labor, directly occupancy if you have that?

Gregg Kalvin

Well, a portion of that was related to purchase price accounting adjustments at the beginning of the year essentially that we benefited from depreciation. There was also cost cutting as Julia touched on earlier around the poor well store cost that helped on that for example restructuring of some compensation plans that we talked about in Q1. Those were the primary drivers of the number during the year.

Julia Stewart

I think as you recall, we said that at the end of first quarter 2008, we made some changes to the bonus plan. We made some changes to several of the other line items and vacation accruals, just some basic what I’ll call clean-up for the business. That certainly rolled throughout the year and then as I said towards the back end of last year we made some what I’ll call really strategic decision on the labor scheduling and really creating efficiency. So it’s almost really in every line item, but don’t underestimate some of that was from the accounting work, at the beginning of last year.

Steven Rees - J.P. Morgan

Yes, the 50 to 150 that’s pure operating improvement or is there more accounting --?

Julia Stewart

The 50 to 150 basis points for ’09 are all coming from real honest to goodness savings. There is no accounting treatment in any of that.

Steven Rees - J.P. Morgan

Okay and then finally just on the re-franchise and I know you don’t want to comment on the timeline, but it sounds like you have assumed the fall 200 to get to your new G&A outlook. So should we be thinking about it pretty lumpy more second half loaded and then I previously you commented not to expect the per unit sales prices in ’08, that those would be higher. Is that still the case or have you seen any changes there?

Julia Stewart

So let me take your questions one at a time. So, in terms of the actual “how should you think about those 200 unit” as I’d mentioned before it can take as much as four to five months to close because we have to transfer all those liquor license, we have transfer all those leases. So I don’t think you should think of it is one day we are closing 200 units, I think you should think about a little lumpy is probably a better way to think about it and I would think about that more focused on the back half of the year than the front half of the year.

In terms of the proceeds, I’m really hesitant to say anything and so we’ve got the final locked and loaded. I think we’ve mentioned before to you that it is our intention to dispose these sales once we have closed an APA an Asset Purchase Agreement and there are no financial contingencies. When that happens, then we will obviously disclose all that.

Gregg Kalvin

Let me just add one point that on the G&A range that we gave on the guidance hypothetically if we don’t sell the restaurant during 2009, we still are projected at the high-end of that range. So I think that’s significant from a cost cutting perspective.

Operator

Your next question comes from the line of Michael Gallo - CLK.

Michael Gallo - CLK

Question I have is on the buying cooperative which you’ve just set up. I was wondering how quickly you might start to see some savings from that and if you baked any savings into the assumption of margin improvement at Applebee’s company operation. Thank you.

Julia Stewart

So, the cooperative was warned a couple of weeks ago. We are actually giving them free rent or discounted rent factors [Inaudible] they are working very diligently on contract. Some were already done for the year, some they are renewing. A lot show up in second, third and fourth quarter.

We talked about our guidance for 2009 that we said a commodity increase for both IHOP and Applebee’s would be less than 3%, part of that is baked in from the cooperative. So in terms of timing and sequencing, I think they will be in a much better position to talk about that as the year progresses, but clearly we baked in some savings based on what we knew they’d get this year.

Michael Gallo - CLK

Then question on what you expect the operating income impact from the 53 week to be in 2009 and I assume that the 53 week of being Q4.

Gregg Kalvin

It will be --

Julia Stewart

Its in Q4. The actual number, I am sure we can get --

Gregg Kalvin

We would have to get back to on that.

Julia Stewart

Yes, why don’t we take a look at that and get back out to you guys because I don’t know if that’s been delineated or broken out that way. We’ll get something out to you.

Operator

Your next question comes from the line of Tom Forte - Telsey Advisory Group

Tom Forte - Telsey Advisory Group

I had two question; first one was I wanted to know on your comments on your confidence in say within your debt covenants for 2009, what the relationship was between that and the projection for 200 re-franchisee Applebee’s stores and if that was contingent on a certain number a 100 plus or just generally what the relationship was between the two.

Then second I wanted to know you opinion on store closures, both for the casual dining industry and then also Applebee’s specific as far as lease explorations or those locations that may not have enough free cash flow to pay the rent.

Julia Stewart

So, let me answer the first part of the question. We don’t need the 200 restaurants to be sold this year in order to meet our debt covenants that we don’t need, I mean certainly our plan includes that. The other issue is on the closure of restaurants, we always have a minimums number of restaurants that we put in our plan, put it in a close because there leases is expiring. It is the minimums it is insignificant at both brands.

However having said that when you ask, as you look across the country and brand are either closing or shuttering, because we are so large it doesn’t have an impact necessarily on the system, but in that particular area of the country and I’m making this up now. So if you see tin-raps on cloths in Chicago, you may see the sale of restaurants, the sale in those area in Chicago go up for either IHOP or Applebee’s a small percentage, because their obviously picking up share, but as a company you are not seeing an up slippage to make a different for the system. At least at this point, Gregg you don’t have any other different point of view, do you?

Gregg Kalvin

No.

Julia Stewart

It’s not a large enough number to make a system difference, but clearly if you see a particular area of the country where a small regional chain or a group of restaurants or a franchisee went down, you’ll see that particular restaurant or restaurants did pick up.

Operator

Your next question comes from [Chris Sipple] – Blueline Capital.

Chris Sipple – Blueline Capital

Hi, I have a quick question, more of a housekeeping item on the cashless statement? There is a $55 million swing in deferred revenue in the fourth quarter? Could you maybe break out what that is?

Gregg Kalvin

Generally, it’s primarily related to gift cards and a swing between 2007 and 2008 just what drive that the most. The gift card sales predominantly at Applebee’s, so depending on how much cash we collect in the predominantly after Thanksgiving and how much redemptions there are we’ll drive that number or that swing in the cash flow statement. That change quickly in Q1 also is redemption for me from cash collected from gift cards in Q4.

Chris Sipple – Blueline Capital

Okay and a question on the impairment charge, $171 million. Where are the components in that in terms of what was written-off that would have been in G&A had there not been an impairment taking?

Gregg Kalvin

Let me give you the components of them. The components of the $170 million are roughly $114 million of goodwill of related to the Applebee’s company operating units. Then it was about approximately $45 million trade gain impairment and the rest were related to impairment of the stores themselves as we have indicators of value during the last quarter of the year and whether write downs were appropriate on that. So, that’s kind of how it foots the 170.

Those numbers essentially math to questions straight to an impairment line item separately on the P&L and don’t go anywhere else.

Chris Sipple – Blueline Capital

What was $45 million -- [Multiple Speakers]

Gregg Kalvin

Yes, it was allocated in purchase accounting is now reduced by approximately 45.

Operator

There are no further questions at this time. I would now like to turn the call over to Ms. Julia Stewart for closing remarks.

Julia Stewart

Well, thank you operator and thanks for your questions. We’ll get back to you the one outstanding question one way or the other on the profit in the 53 week and we look forward to talking to you at the end of our first quarter. Thanks again. Take care.

Operator

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

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Source: DineEquity Inc. Q4 2008 Earnings Call Transcript
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