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Dineequity, Inc. (NYSE:DIN)

J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum

March 08, 2013 12:45 pm ET

Executives

Julia A. Stewart - Chairman, Chief Executive Officer and President

Analysts

John W. Ivankoe - JP Morgan Chase & Co, Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Welcome back to restaurants, everyone. This is John Ivankoe from JPMorgan. It's a pleasure when one makes a call and the call works for more or less the right reason. And what Julia has accomplished since 2007 of being the franchisor of IHOP, buying Applebee's, taking on significant leverage in what was a very difficult credit market and industry conditions, turning the business to nearly 100% franchised and now giving investors the opportunity of viewing the highly cash generative nature of what your business can be, but currently and longer term has been quite a testament to Julia Stewart's skill as a CEO. So the stock has done great as a function of that. We think there's still room to go. And we do look forward to DineEquity's Chairman and CEO, Julia Stewart; as well as CFO, Tom Emrey, discussing their story with us today. So thank you.

Julia A. Stewart

Good. Thank you. So I know this is sort of a fireside chat and take questions. We're -- I'll just lead off with we're very pleased with where we are. I think he did a nice job of sort of summarizing. I came to IHOP in 2001. We rebranded and reenergized that brand, increased sales by about 45% by restaurant, became #1 in the category, and then we set out to make an acquisition and Applebee's came along. We made the acquisition of Applebee's. For some of you who don't know, before I was at IHOP, I was at Applebee's. So I was very familiar with the brand and what was involved. Don't think the Board of Directors would have ever let us buy it had I not worked there previously. It was the same 38 franchisees, and we knew what we needed to do to reenergize it.

So we made that acquisition in late 2007. Borrowed about $2.4 billion, did a full securitization of both royalty streams on both brands, back then you could do a securitization. And for the last 5 years have been reenergizing the Applebee's brand successfully, paid down over $1 billion in debt. Announced last week we would return cash to shareholders in the form of a dividend, $0.75 a quarter. And we got a share repurchase authorization from the Board of Directors for $100 million.

So we're in a good place. We -- somewhere right in there towards the end repriced the debt a couple of times. So the debt's in good standing. And I think as we've said repeatedly at the end of 2014, our bonds come a calling or at least they're callable at 104-point-something. And so will put us in an interesting position to refinance the bonds at that time. So that's sort of our short version of where and who we are. And I'm -- I can call on Tom, I can call on myself to take questions.

Question-and-Answer Session

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Yes. And just for context for everyone, the bonds, you have $785 million bonds at 9.5% interest rate currently.

Julia A. Stewart

That's correct.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And that's relative to a share count somewhere in the 18 million and 19 million dollar range. So I mean it's fairly substantial. So I mean, as we -- I mean, that's a -- it's a fairly profound event in your company's history to be able to refinance that. So maybe -- are you beginning to think about what level of leverage you can support? And to put this into context, we saw Burger King, we have Domino's, we've seen Dunkin' Brands. That says the industry is kind of talking about 4.5x to 5.5x in perpetuity in leverage. I mean, do you think like what those other companies are talking about, more or less, fits with how you want to run your business?

Julia A. Stewart

We've been asked that question a lot in the last couple weeks. I think the best way to answer it is, we're about a 4.6x, 5x now, as you know, because we sold EBITDA last year when we sold the company restaurants. The actual EBITDA will go up, just the leverage ratio will go up just slightly this year. But I think we've said around a 5x, which is where we are, we're comfortable with at this point. But I think as we've said, you never know with the interest rates and what's going to happen in the economy. So we'll kind of leave that as it is. And people ask us all the time, can you refi the bonds right now? And the answer is no. Not right now. It would be astronomical to do so. But that isn't to say that we aren't looking at it and talking about it all the time. So we're hoping towards the end of 2014, early 2015 we can do that.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And obviously, the yield to call in the bonds does continue to drop until we basically get to October 2014.

Julia A. Stewart

It does. It does.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

So what's interesting from a board perspective, you being a member of that, I mean, at what point kind of having the security of I don't know what, paying a 10% or premium, whatever it would be -- to whatever point, like having the insurance of knowing your capital structure today versus waiting 15 or 18 months to do that? I mean, is it not worth the insurance premium to do a tender for your bonds? I know you can't call them. But you can certainly do a tender for them.

Julia A. Stewart

Right. I think for us the best way to share this with you is we talk about this and think about this all the time. So it's not one state in -- as you know, we've repriced the debt, not the bond debt, but bank debt twice since 2007. So it's not as if we aren't looking at it and being thoughtful about it. And we look at it consistently. Tom and his team do a great job of evaluating it all the time. I think the reality is, you just -- right now, we're telling people towards the end of 2014 is realistically what we're looking at, anything's possible. As you know, a couple years ago, when we got out of the securitization, securitization was not in favor. Today, it's more in favor, right? So there's a lot of different choices, and I think we just have to keep looking at it. But right now, we feel very good about where we are and the repricing.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

There's been a lot of volatility in the space in general, and whether it began on January 15 or January 31, it certainly was the first half of February. And I mean, anecdotally, people say that Applebee's, it's a middle income consumer. It's general America, might even be a little bit lower income. And it's been postulated that you would be more affected than a lot of your peers in terms of things like gasoline prices and payroll tax. I mean, do you have a defensive enough brand at this point that can maintain traffic at least relative to the industry with what's happening with your customer base?

Julia A. Stewart

So that's the other question I get asked a lot about. And obviously, we don't comment on inter-quarter. There has been enough written about the last 60 days to fill a book, from Wall Street Journal to everybody and his brother-in-law has written about the economic environment. There is no question, and you've quoted me on this several times, I still think the economic environment is lumpy and bumpy. I don't think it's perfect. I think the consumer has been pinched and squeezed, certainly from the tax and certainly from gas prices. Although this wouldn't be the first time we've seen gas prices. I think the way I always answer that question is, look, we're focused on the things we can control. I can't control tax prices. I can't control ObamaCare. I can't control any of that. What we focus on is how to reenergize and keep these brands differentiated, unique. We spend an inordinate amount of time on innovation and creativity. I think you just saw. We just won #2 in the restaurant industry for the Most Innovative Company with Fast Company magazine. I think we're very focused on doing the things that make a difference for our brands and give our consumers even more value. The one thing I would say that's become obvious is value is sort of I think for a while here to stay. I think there was a lot of discussion a couple years ago about, well, this will be passing, this will be fleeting. But I think everyone is oriented towards value. I think the misnomer is value is not just about price. And I think a lot of people out there, and I've told you this before, a lot of our direct competitors are simply giving a great price for existing products. That is not what we do at IHOP. It's not what we do at Applebee's. We've reengineered products so that I make money and franchisees make money. And that's a distinction. And when people say what to point to, I look at the commercial that's currently on air at IHOP, which is the breakfast sandwich. That's a half a sandwich for $4.99, right? Think about it. The average check at IHOP is $10. So the reason we're able to do that is because we make money with that half sandwich. The franchisees make penny profit and about 4:1 people are buying the full sandwich when they come in the restaurant. It's the most incredible sandwich. I encourage all of you. We have several restaurants here in Vegas. I encourage you to go have it. It's pretty remarkable. And it really does give everybody in fast food, fast casual and family dining a run for their money, which is what you'll see a lot more. So value isn't just price. It's what you get. It's handcrafted. It's unique product. It's very different than everybody else in the industry. That's what we're trying to do more.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

So let's stay in the theme and let's look at the brands separately, if we can. So Applebee's, bar and grill, it's one of the nastiest words you can say, it's commoditized. It's what you read a lot in the press and the analyst community what have you. So I mean what are you doing specifically in the menu service atmosphere side to differentiate Applebee's relative to the broad bar and grill industry or the casual dining industry?

Julia A. Stewart

So one of the things I always have to remind people is casual dining -- I think people have a misnomer -- is 75% independents. It's made up of 25% of chains. So the reality is, even though you see me all the time because we spend upwards of $140 million on television, and you've got Chili's and some of the other players. The reality is, stealing market share comes largely from independents. And they're everywhere you look. They're here in town, everywhere. And so our opportunity in terms of stealing share and differentiating ourselves comes as much from independents as it does from the brands. So having said that, in my way, there's probably several, I can spend an hour, but I'll give you the 3 or 4 that I think are prime for us. We are the only restaurant chain in the casual dining industry that has a purchasing co-op. And so I think when we first did that, when we made the acquisition, there was a little bit of people scratching their head. But when we were doing the due diligence to purchase Applebee's, we found out that 76% of all the products we were buying at IHOP were from the same manufacturer that Applebee's was using. So we formed this purchasing co-op. We wrote a check. The franchisees own and operate it. It's about a $2 billion a year spend. And I just want you to think about it. If you're driving by Marty's, and it's a single unit casual dining restaurant, he is not paying the same price for his food that we are. There's no human way to do that. We're doing about a $2 billion spend. So we've been talking for the last several years about the SKU consolidation between both those brands. I always use the example of pork. We're the largest buyer of riblets in the world, and we're probably the second largest buyer of bacon because of the 2 different brands. So you go to a pork distributor and you say, "I'll give you a great price, but you have to produce the best price for us because we're the largest buyer. And we do get the best price." We then turn that around to our franchisees, who in turn, turn that on to their franchisees. So when you actually look at physical prices, what people don't spend a lot of time looking at is the actual price. So when I joined Applebee's in 1998, I think our average check was $11 something. Today, it's $13 something. So it's not as if we've created this huge average check increase. We've actually encouraged our franchisees to keep the average check low, but be able to provide value to the consumer. That is huge in our category, especially in casual dining. So the actual price point is a key indicator of value messaging, and what we've been able to do in part because of the co-op. That's about 50% of the savings is coming from the food cost line. Probably another 50%, and I've talked about this, when we put the 2 brands together, we had 56 distributors in the domestic U.S. Today, we have about 30. And when you are able to consolidate distribution, that's huge. Arizona is always a good example for me. We had 4 distributors when we started in Arizona. Today, we have 1. So that's full truckloads in, full truckloads out. That's major savings for the middle of the P&L for any franchisee. That's just -- you're able to do things that the average independent just can't do. So never forget that you start with a different baseline or a basis point of improvement, then you move on to the branding work, which again, an independent cannot compete when our guys give out over 3.5%, 4% advertising of their gross sales. So now I'm on television, right, shouting at the top of our lungs about Applebee's in a pretty meaningful way. ESPN, we have the largest contract with ESPN. We've done a tremendous work. I have the commercial. I don't know if we can show it. But it's a great spot between 2 coaches. I'll let it go with that. You have to see that on ESPN. And then the work we've done on social media and all of that work has made a difference for us. And we get Tweeted every 11 seconds at Applebee's. We're sort of becoming this whole new way and genre to think about that. So I think we've done a very good job. Then the last part is all the innovation and the creativity, which is where we're focused on right now. I don't talk a lot about that because most of that is highly competitive. The way you should think about that is innovation and creativity in the back of the house and the consumer facing, which we're spending a lot more time and energy on today than we ever have before. Because we sold all the company restaurants, when we made the acquisition, there were 510. Today, we are left with 23 in Kansas City proper. We've sold everything else. So you should think of us as using those 23 R&D restaurants, as well as the franchisees to come up with innovation and creativity and test it. So whether it's technology, whether it's different ways to market, whether it's different ways to go to market, whether it's different service platforms, you name it, we're testing it. And our objective is to be different and unique to the category. And even as the category lines blur, that's our job to be first now. We get copied rather regularly. We're the ones who came up with 2 for $20. Now everybody's got 2 for $20. We're the first to come up with Under 550 and fabulous. Now everyone's Under 550 and fabulous. But I don't worry about that. I think we just keep our eye on the prize, which is to continue to differentiate and innovate. And if you think about our CapEx, we spend about $8 million to $10 million a year, which is nothing, on $8 billion of system sales. And the way you think about that is, the little bit of CapEx we use is either for IT technology or testing in some of those company-operated restaurants, right? That's how you should think about it. So all of that, the purchasing co-op, which now is going to start going after nonfood, so furniture, fixtures, equipment, small wares. I have a whole program that I've been putting together. We have -- we found out through our evaluation we have 295 insurance brokers in the domestic U.S. for 450 franchisees. So if I can consolidate that insurance brokerage, which is what we've been working on, I can save those guys a lot of money. So our job, when you're 99% franchised, attack everything in the middle of the P&L that we can possibly help these guys make money or save money on. And the reason for that is they're more likely to reinvest in their business. That's just simple math. So by the end of this year, the franchisees at Applebee's will be over 75% remodeled. That remodel is about $225,000. It's been ROI-ed at about a low-single digit in terms of comp sales. They love the results. The new prototype was just built in Memphis, Tennessee. That prototype, you think of it as more energetic, more resonating with guests, sort of more of a bar presence, whether it's craft beer, wines by the glass. And this notion of creating something that is unique and different, that's really our job. But I think people forget that you're distinguishing it through a co-op. Advertising that is bar-none the largest and obviously we're #1. So there is no restaurant chain in America that has 2 #1 brands. So we're #1 in casual dining at Applebee's. We're #1 in family dining at IHOP. So that creates a uniqueness, but it also creates an unparalleled ability to use the best demonstrated practices of both.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

So the remodel is a low-single digit comp lift? I mean, wasn't it a little bit higher than that maybe at one point?

Julia A. Stewart

No. I think it's been about -- I think it's been low-single digits since I can recall us talking about it, right? A 4% or 5%? Yes.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay. And so what -- is it 4% to 5%? Or -- I'm sorry for being crazy.

Julia A. Stewart

No, I think it's like, haven't we always said it's low-single digit comp sales like a 4% or 5% comp growth is what the guys are getting out of the remodel.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay. And so -- I mean, presumably, that's done in 2014?

Julia A. Stewart

Yes.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

So but that's, obviously, it's a big capital project. It's a disruption for the franchisee. I mean, what do you imagine is next? And I mean I have to look at one company to see what's potential in another company. Chili's did a lot of changes in their kitchen. And I'm sure -- I don't know if you've seen it in person, but I'm sure you're aware of a lot of what they've done and the margin implication that that's had. I mean, do you have a similar opportunity for your franchisees? Any technology change or systems change?

Julia A. Stewart

I don't think we have the same -- I can't speak for any other competitive set. But I think, for us, it's all about innovation and creativity. And when you think about some of the things we're testing, it's not thousands and thousands and thousands of dollars. It's a simple process here or a simple piece of equipment there that really does enable us. The object is not to have a menu of 1,000 items, but rather items that the consumer wants and needs. One of the things I've talked about before that we are looking at, at both brands is what I call decoupling. So in the old days, you used to buy your item and get everything with it. So everything at IHOP comes with pancakes, everything with Applebee's comes with French fries. If we can decouple some of those products and charge differently for them or sell them differently, I think there's opportunity there. So we're taking a lot of look at that. That's less about technology. That's more about innovation and creativity. So I don't see us as needing to start all over in the back of the house. I think it's much more about that innovation and that creativity, which isn't, like I said, thousands and thousands of dollars. But thinking very differently, a pay at the table is not new technology, but certainly we're testing that. And that has very interesting implications for both brands.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And what have you done with mobile loyalty? I mean, I had seen your Twitter feed, for example. But I mean, how do you do like one-to-one customer marketing [indiscernible]?

Julia A. Stewart

So that's a really good question. And as you know, one-to-one marketing is probably more importantly today than it's ever been. And I swear I'm going to send a video with me and share it with all the investment community. We're producing it for the board, but I'm going to show it to the investment community, which is literally how you interact with this whole new generation of people who -- there's a communication going on 24/7. You have a choice to participate in it or not. So literally, you should think about people sitting there all day long and engaging and interacting with the bloggers, with the Tweeters. So we have been testing a platform that works for both brands. And the way you should think about it is, information technology that has an enabler, that's a base plan that can give a loyalty program to IHOP and a loyalty program to Applebee's. That's in the test phases. There's a lot of work that we're doing in that regard. And franchisees are very open-minded to it because in the end, it's not just about giving you free food, it's all about getting your e-mail address or your cell phone number and being able to have an interaction with you one-on-one. And there are millions of Americans that, believe it or not, don't erase that but rather want to have an interchange. And that's the work that we're working on right now meaningfully.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

What about unit growth of the Applebee's brand? I mean are you at the place now where that can begin to be restarted?

Julia A. Stewart

Yes, I think I said a couple years ago, when we made the acquisition, we were far more focused on these guys remodeling their restaurants, which was a considerable amount of money, $225,000. And we wanted to get that remodel done because we thought that was important for brand differentiation. And as I said, will be largely done at the end -- at least 75% done by the end of this year. So we have been very focused on these franchisees starting to develop again. Now the model is slightly different between IHOP and Applebee's. So at Applebee's, you've got 1,900 and some Applebee's in the domestic U.S. owned by 38 franchisees. So we're unusual in the industry in that we have the average franchisee has 50 or 60 restaurants. And so the growth is a sprinkling and then some of our largest opportunity, frankly, is on the West Coast, California which has some of our largest opportunity. Where Greg Flynn, which is Apple American, is the owner. He's the largest franchisee in the system. He has 400 Applebee's. He's backed by Goldman Sachs. He has an opportunity on the West Coast. As you know, wherever the brand grows, sort of it goes this way. So the brand started in Atlanta and it got leased to the West. So there's an opportunity there. And then Greg bought our Boston proper market, which was company-owned. And there's an opportunity in what I call the mid-Atlantic area for large growth. Those are 2 big opportunities for us domestically and then you'll see the growth internationally. We've obviously -- we're big in South America, Central America and Middle East, and we'll get bigger in those areas. We want to focus on those areas. We certainly have a unique opportunity in Southeast Asia as well. So that's sort of the focus for the franchisees. So you'll see some growth for each of the individual franchisees. But some fairly meaningful growth in the West and in the Northeast. That's Applebee's.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And some years ago, we talked about potential generational changes within the Applebee's franchise community. I mean, a lot of these operators have been operators for 20-plus years, I guess, in your system. I mean, is that a risk or an opportunity at this point?

Julia A. Stewart

It's probably an opportunity. You're the first person who's really asked that. And last year, we had more transfers than we probably had in 5 years. So part of that was the taxes. A lot of these guys sold before the end of the year for the tax benefit. So we probably had, I don't know, half a dozen on the Applebee's side sold and plus or minus went with -- sold their restaurant to either existing franchisee. I think we had 2 new franchises join the system. Remember, to be a franchisee of Applebee's, you have to be of substantive nature. So we're not competing with Jack in the Box or McDonald's or Wendy's who's selling 1 or 2 at a time. You're talking about people who buy 50, 60 restaurants. So these are people who are meaningfully backed either by private equity or have access to substantial capital, and they're typically people who have other businesses, right? So the guy that bought all 65 Applebee's in Michigan, he has 2 other businesses. Typically, they're either a large fast food franchisees or they have other related businesses. So they have infrastructure and wherewithal. One of the things I've learned over the years is these franchisees have to leverage their G&A. So at some point, these guys want a second or a third concept. So about 90% or 95% of the Applebee's franchisees have a second concept because the reality is they're leveraging that G&A. On the IHOP side, that's a very different story. So it's 365 franchisees in the domestic U.S., half of them are single-unit operators. That's because of the old model, where we built the land and building and sold it to the franchisee. So they basically bought a job. And then the other half are anywhere from 2 to 5 average unit ownerships. And then we have some big players like ACG, our largest player. Again, a lot of those guys are all backed by private equity. And in that case, you have about 1,550 restaurants in the domestic U.S., you certainly have an opportunity to grow. We have 200 and some that are either have signed up or optioned to develop. There, the development is sort of across-the-board. There's not any one pocket, if you will. It's more a little here, a little there. But they're certainly opportunistically. You saw the guidance this year. We guided 90 to 110 restaurants that we would build in the U.S., not we, the franchisees would build in the U.S. and outside the U.S. The large majority of that is still in the U.S. But you've seen what we've done with large, well-heeled players outside the U.S. like Alshaya group, which will build 50 IHOP -- 40 IHOPs in the Middle East. And I think I mentioned on the last investor call that the -- his opening in Dubai is one of the best in U.S. history. So there's no question, we're having an impact in some of these countries where -- and we've always said, you had to have 3 things to build outside the U.S. They have to like American. So that's why you won't see us in Western Europe. That's a joke, but it's true. That you have to have favorable franchise laws. There are some countries that do not have favorable franchise laws. We are not going there. It's too difficult. And the economics in the middle of the P&L have to work. So those are the 3 things we take into consideration when we think about international. So yes, the short answer is steady growth. Now I know people kind of hem and haw because on our base, because we're so big, the largest in the world, I know 5% or 7% doesn't seem like a lot, but that steady growth is still in our future for the next several years.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Yes. I was actually surprised to see how high your IHOP comp guidance was. I mean, you obviously – I mean it performed lower than I think what you would have wanted in 2012. And it was my impression that the average ticket there really had to come down. So I mean, can you kind of talk about what -- how you imagine kind of IHOP getting fixed and you being even close to flat in 2013? And of course in the context of the consumer and the economic environment?

Julia A. Stewart

Right. So to answer this question, I have to give about 2 minutes worth of history because it won't make sense to you without the history. So it if you go back to 2001, when I joined IHOP, it was sort of vanilla, didn't have much of an image, hadn't had any comp sales and traffic growth in several years. It was just sort of this quiet, sleepy brand. So when I got there, we did a lot of low-hanging fruit. You know low-hanging fruit is taking all of the advertising that they were doing locally and making that national, having a remodel program that every franchisee had to effectuate. We did work on the menu. We did work on the service platform. We did work on the brand positioning. That gave us about a 46% average growth in the average unit volume of every one of those restaurants, right? Doubled market share, took us first in the category. We stole a lot of share from the category, largely from the independents and really made a difference in that brand. About 2.5 years ago, 2 years ago, we started noticing a slowing of that again. So we'd sort of been the talk of the industry and then all of a sudden, we started seeing that slowing. One of the realities is, we did a ton of proprietary research to look at why was there that's slowing? And part of it was about the fact that everybody and this brother-in-law had gotten into the breakfast category. So in last 5 years, it has quadrupled, the number of people who've gotten into breakfast either fast casual players or fast food players. So all of a sudden you have all of these people getting into breakfast. And suddenly, our -- what ended up being a $10 average check at IHOP wasn't necessarily as meaningful as it had been. So we set out to do major work. And that's what we've been very focused on, this plan of attack. So we already had national advertising, but now we're making that advertising much more effective, resonating much more with guests, doing that advertising differently. So think of us as getting very creative about our reach frequency strategy. It's a different strategy than Applebee's. We aren't on ESPN. We go after a different market segment, but that work has been very successful. You couple that with the work we're doing on the menu. And the best way to describe the menu to you is that what had happened over time is these franchisees weren't pricing sides and drinks at IHOP. So you would go and have your meal and then you would get your check and you'd have sticker shock, right? Because the entrée wasn't expensive, but you added $2.95 for the orange juice and $3.25 for the hash browns or the bacon, and suddenly the average check got high. So we began to really focus on that. And on June 1, this year, the new menu across the system every franchisee will have to price their sides and their drinks, right, which will force them to think much more about pricing. And then we have really done a lot of work on reengineering the actual menu items to give them the opportunity to price in a value message. So it's not as if the -- I'm asking franchisees to lower their price point, better to hold it and do more of the work that we're suggesting. A lot of work in the operational improvement, the sticker shock improvement, better operations, better food, lot more systems and processes than we've ever had before to deliver. If you've ever been in the back of the house, and I think this is a bit of a misnomer, I was with a bunch of operators this week, Applebee's operators. I think people don't realize, the IHOP back of the house is far more complicated than an Applebee's. Far more complicated. So at an IHOP, you have 2 double kitchens on a Saturday and Sunday. You're literally filled in the back of the house. It's 180 menu items served at breakfast, lunch, dinner and late night. It's 24/7. There's no alcohol. It's a whole different back of the house structure. So what we're trying to do at IHOP is make it easier. By making it easier to execute, you have a better experience when you go in there. So what we were trying to guide and share with our guidance was that we have been working so hard on all these different aspects of the business, we obviously see and believe in improvement.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

To talk from a corporate perspective, I mean, your G&A was even lower than what we thought it was going to be in 2013. Do you have everyone that you need in the company? I mean is there any executives or functionality that you feel, that you need to add in what is obviously a increasingly share-battle sector?

Julia A. Stewart

So we don't know how to measure success because everybody puts -- they throw in the kitchen sink in G&A.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Right. That's difficult to benchmark, right?

Julia A. Stewart

So we've had a difficult time benchmarking us against others. I think if you just take our total system sales and divide it by $143 million to $147 million, which is our G&A this year, we got to be one of the lowest in the industry. So that I know of. And from us, G&A is -- Tom has done a really good job of keeping us incredibly focused on G&A because it's one of our levers that we can really utilize. But I think that reorg that we did last year. Remember, we laid off over 100 people, 50 of them were because we sold all those company restaurants. The other 50 were just really trying to look at rightsizing the company. But we don't talk about this a lot. But one of the things that we did last year is everything at IHOP and Applebee's with the exception of marketing, research and development and operations, everything else in the company is a shared service or a center of excellence. So I don't have 2 of anything. So everybody is getting a bigger job, working harder and has access to both brands. Now from the research I've done, guess I what I find out? People prefer that, would rather working in an environment where they have access to giving their knowledge and skill set from both brands. So it's been sort of a win-win for us from a morale perspective and certainly from the results that we've been able to get. So the short answer is, I think we are where we need to be. I don't think you're going to see any huge -- Right? But if you think about it, from the time of the acquisition, now we've saved over $50 million in G&A. So we've had a major influence on the G&A.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Internally, it's difficult to ask this question, I mean, wouldn't you always want the IHOP people to compete against the Applebee's people just to see who can do a better job and get more customers in the store? I mean, at the end of the day, I mean, there are times when customers choose between the 2 brands. I mean, you can have a hamburger or you can have dessert. You can do a lot of different things in a very similar way at the 2 brands.

Julia A. Stewart

So I know you would think that...

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Marketing, product development, operations like you want to say, listen, I'm -- as opposed to kind of shared services of excellence, but it just...

Julia A. Stewart

Yes. Philosophically, the way we think about it is, first of all, what's starting to happen is franchisees are crossing over, which we knew was inevitable, right? They like us. They like our structure. We manage by a relationship, not the contracts. So more and more and more, you're seeing Applebee's franchisee become IHOP franchisees and IHOP franchises become Applebee's franchisees. Because what starts to happen is, they like what they see, right? And they're 2 different business models, but they do well because IHOP plays so in the breakfast arena in the U.S., and Applebee's plays so in the dinner, I don't think it's a day-to-day competitive set. What we really see is the value not so much from a marketing or a culinary perspective but sharing resources. So for instance, let me use an example, IHOP's had the machine down of developing. We've been developing, the franchisees have been developing 50, 60, 70, units every year for as long as I've been there. That machine was pretty well oiled. Applebee's didn't have a machine because it hadn't been developing for years. So we took that machine, we shared it with Applebee's. And now all of a sudden, that machine is working. So that's a really good example of transferring skill set and knowledge. Conversely, Applebee's figured out a couple of years ago how to get a market in a very, very expedited fashion, IHOP didn't. So we took all those skill set and learnings from how to get to market in less than 16 weeks, and we transferred that over to IHOP. So when I think about sharing best demonstrated practices, it's about getting things to market faster and better. It's not necessarily about stealing an idea. Because again, we go to market in completely -- I would never go on ESPN and spend 15% or 20% of my budget on ESPN, be a waste of money and time at IHOP. At Applebee's, that is a major force for us, is the NCAA or football or whatever it is because of the bar business. So it's really thinking about those businesses differently, but the sharing of an enterprise. Or IT doing one benchmark for both brands to do the loyalty program. The loyalty program will be different, but the IT infrastructure will be the same. So it's really trying to use the best demonstrated, and by the way, if I figure out on the IHOP side how to keep certain things warm on the frontline, and I can transfer that knowledge, I could keep French fries hot on the Applebee's line. So it's things you aren't ever probably going to see. It's things in the back of the house that are enablers for the franchisees. I think that's more of the way to think about it.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Well, I mean, obviously, there are big companies -- multi-branding has been done a lot of different ways in companies, but I mean, you're most honed in on the shared services model. How scalable do you want it to be? I mean, is it -- I mean, your tenure as a CEO, I mean, is that -- does there need to be a third brand for the stock to continue to work for value to be continue to be added in this company? I mean, what is it that you want to do?

Julia A. Stewart

So we've been very clear that today, right now, we are not interested in an acquisition. We're very interested in getting these 2 brands as successful as we can make them. We think there's lots of upside potential and opportunity for our franchisees both domestically and internationally. And that's really the focus along with this, I have one eye clearly on this refi down the road. So I think those 2 things put us in a different position and play. And we talk like it's no big deal that we're #1 in the industry in both brands, in both categories, but to stay there, that's a big deal. So to stay #1, we have to stay out in front of it. Now clearly, if I had my druthers, we'd create an insurmountable lead, right? There's only one person in America who has an insurmountable lead, and that's McDonald's. So if you get to a point in your category where no one can touch you, that's kind of where you'd like to be. So that's how I think about it for the long haul. But in order to do that, we have to have very successful franchisees who have the wherewithal, the expertise and are willing to reinvest in the business. Now fortunately for me today, we have very wealthy, well-heeled franchises who have that access to capital. Certainly, on the Applebee's side, and I think we're getting more of that on the IHOP side. I talked about the consolidation on the Applebee's side, but we're seeing a little bit of that on the IHOP side as well. So short term, it's all about making certain those brands are as successful as they can possibly be.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And well, I mean, we've had this conversation before, and I ask you the question every time I see you. Much of the -- Applebee's kind of grew into 2 major periods of time. I mean, one period was the mid-'90s and another period was the mid-2000s.

Julia A. Stewart

You're going to ask that again?

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Well, it's important. I mean, then by the way, you kind of like, help me with that thinking about -- we're talking about franchise renewals after 20 years. And these are stores that are highly cash generative. And to your point, it's like any investment, it's about risk and return. It's like there's no risk -- that the risk of the next 20 years is very different than the first 20 years. It's worth more than what the initial franchisee fee was.

Julia A. Stewart

So...

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And this is – I know we're having a private conversation but...

Julia A. Stewart

We banter this back and forth. Sorry about that. So I brought it up and he's going to take me to my grave on this. So when you buy a franchise, you get 20 years. That's pretty standard in the industry. It's always coterminous with the lease or it should be, right? At the end of 20 years, you have to come to us, the franchisor for renewal. We have the right to renew. We have the right to decline. On the IHOP side, and this takes too long, remember, back up for a second. There are 2 income streams. On the Applebee's side, the only way we make money is the 4% royalty. So that if you look on the segment profit, the way we're making money in Applebee's is off the royalty income. On the IHOP side, we have 3 royalty streams. We make money off the royalty. We make money off the dry mix, that happened years and years and years ago. They pay a royalty rate for the dry mix for the proprietary pancake mix. And about 750 leases, we're the master landlord, and we take a spread on the rent. So that royalty, that income, that spread on the rent and the lease of the equipment and the franchisee fee notes, all of that is in that income line. And so we make income 3 different ways on the IHOP side, one way on the Applebee's side. And what he's referring to is after 20 years, when you're coming up for renewal, we will either say yes or no to you. If we say yes, the question is how much do we charge you, right? So you're sort of guaranteed another 20 years' income stream. What's that worth to you? And at IHOP, when I first joined, I took that up to $50,000 in a renewal fee, and then on the IHOP side, it's been de minimis. So right now, we never even talk about it. It's de minimis on the segment profit line. But his point is, at some point down the road, we will come into some substantial renewals because at the height of the growth in the segment in both brands, sometime in the late-'90s, they were building 100 a year. So 100 a year, that's a substantial income. So we have always said, when we get close to that, we'll share that with the investment community and talk to you about what that is. So we have some time to determine what is the right renewal factor. And if you go online and you look at 10 public proxies, you won't see any likeness. So Wendy's doesn't look like McDonald's, McDonald's doesn't look like Burger King, Burger King doesn't look like us. We don't look like Dunkin' Brands. Everybody does it differently. Royalty is pretty substantially the same. But in this renewal race, it's very, very different. So the question you have to ask yourself is, is it different for Applebee's than IHOP? Because at IHOP, we don't have any intention of going off the master lease. Assuming it's profitable, that'll be in perpetuity. So those 750 master leases we sit on, for the most part, we'll stay on them in perpetuity. That's why for some of you who try to figure out our debt factor, you have to look at those master leases because S&P and Moody's consider that a small piece of debt because we're paying on the leases. But the reality is, we take quite a spread. It's very public. We talk about that. But that's how they got into the business years and years and years ago.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And McDonald's does the same thing.

Julia A. Stewart

McDonald's does the same thing. So anyway, we are having this discussion. There's plenty of time to talk about what's the right factor. I have to be very thoughtful about that, right? I don't want them to leave me in droves. It's a fine line you're walking here. I don't want to be greedy. But on the other hand, we're sort of guaranteeing them another 20 years. So you have to think about what that's worth, or 10 plus 2 5-year renewals. But -- and you'll see more of that in the industry just as we lap ourselves. But for us, it was in the late-'90s that there was a fair amount of development done at both brands by the way. Both brands were in high, high course.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Interesting. Thank you.

Julia A. Stewart

You're very welcome.

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