Dine Brands Global, Inc. (DIN) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the DineEquity Inc., Second Quarter 2012 Investor Conference Call. My name is Tony, and I'll be your operator for today. [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 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 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'll 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'll 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're 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'll first review some highlights for the first half of the year and then Tom will recap the second quarter financial performance. We're pleased with our financial performance for the first 6 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 6 months of 2011, and we've revitalized the Applebee's brand. At IHOP, we're in the process of testing a variety of new menu items. We're also continuing to value engineer the menu, improve operations at the restaurant level and we've recently commenced a new advertising campaign to relaunch 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 #1 in their respective categories by Nation's Restaurant News on the basis of U.S. 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've mentioned in the past. I'm 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 4 years ago. We have completed the Applebee's refranchising and transitioned to 99% franchised system upon closing of these transactions. We will have substantially lower G&A, by over $50 million. We revitalized Applebee's with new marketing and advertising, major menu innovation, an 18-month pipeline of new and tested menu items, and a remodel program that is running ahead of schedule. We've been at the forefront on creating popular value platforms. We've improved the operations of both the company-operated and franchised 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'm 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 of 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 workforce 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 3 pending transactions which are expected to close fairly close to one another, we will revise 2012 guidance only once after all 3 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'll tell you more about what we're 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 0.7% 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 utilization of social media and promotional events. On innovation. In July, we launched Applebee's new campaign, See You Tomorrow, which communicates that we're 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 has a 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 3 new restaurants in the second quarter, of which 2 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. Reenergizing 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've refined our restaurant operations based on feedback from guests. We completed the rollout of the 2 key components of our operations improvement plan, which I've 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've 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 craveable food to satisfy the guests. 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 guest 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 ad showcased 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 6 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 on 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 guests' expectations. We believe that this strategy will culminate in ultimately driving traffic and sales. We've done it before at IHOP, we'll 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've accomplished much, we are cognizant that there's 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 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 that 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 a lower pretax earning in 2011. Now on 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 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 3 deals are closed. And now, I'll 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 categories. 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] Your first question comes from the line of John Ivankoe of 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 or your leverage ratio, as you talk about it, do you think you no longer have to pay off debt with your free cash flow, and maybe some more money can be returned to equity holders? And kind of in that context, I mean, now that, you've 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'll let Tom answer the second part. We're going to stay hold -- true to what we've been saying all along, which is that we're 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'll certainly come back and talk to the investment community about what's next. But I think at this point, at least for the balance of the year, that's going to remain our focus. I'll let Tom speak to the refi.

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

And Julia, if I may, if I'm still on, I mean, you're -- you've obviously, coming at again, achieved something that you set out to do 5 years ago, I guess it is now, in terms of getting to a 100% franchised. And it seems like the shared services model -- I mean, it's probably more prevalent across the 2 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 -- you achieved, 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've always said, it's less about an acquisition and it's more about what's 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 in a good position in 2013. But you're right to say, all of the options are on the table. We've done some of these before, we'll take a look at it again. But it's 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 look like. Just let us get through the balance of this year, but we promise, we'll be back to you in 2013.

Your next question comes from the line of Michael Kelter of 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's 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's going to take more than just the ad campaign. I'm 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 items, specifically since there are a lot of moving parts, between the 3 most recent refranchisings, 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've got to separate out the 2 things on G&A. One has to do with refranchising, one has to do with the reorganization.

Yes, I mean, what we've got is what we've 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 for the each of the different -- the latest 3 refranchisings you had announced $1.3 million of savings, then $1.6 million, then $2.6 million. So is this $10 million to $12 million include that or is this $10 million to $12 million is in addition to that?

No, it includes that.

Okay, got it, 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? What they're doing before? Why you don't need them anymore? I'm just trying to -- want to get an understanding of where there is room to cut and make sure that we're not cutting into muscle.

So about -- of the 100 or so that we are cutting, about 1/2 or so are due to the sale of the 65 restaurants in Michigan, so they're largely field people, above store, that's the way you should think about it or the left of the remainder of people who specifically worked only on company operations. So that's about 1/2 of it related to Michigan. Few people as I think I've said, probably over the last couple of years, tail-related, so there are 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 2 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've really evolved to just a franchise model. That's one of the biggest levers, at least I can think of to get the P&L moving up into the right. And when I look at where things are at right now, Applebee's, there's been no unit growth year-to-date. There's many closings as openings. In IHOP, net unit growth this year is 8 units year-to-date in the first half of the year versus 20 to 25 at this point in the year in 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 some reason why maybe you won't see as much unit growth as you had in the past?

So you have to answer that 2 separate ways. On the IHOP side, since 2003, we've 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's 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've committed to on the IHOP side. On the Applebee's side, to refresh your memory, when we made the acquisition, we never made the acquisition with the assumption that we had to do a lot of development. It's all about reenergizing the brand. Now that we've done that, we've begun to speak to franchisees about development, and they've begun to be interested again. Frankly, as I've 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 we'll 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 begun to show an interest. We've 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's a ramp-up, it doesn't happen overnight. It that takes time to build the pipeline, time to sit down with each of the franchisees. But I think you'll see more of that in the coming years.

Your next question comes from the line of Bryan Elliott of 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 sort of 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, if...?

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's 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 declines. So we have to work on value engineering that menu quickly, and making it viable for all guests whether they're oriented towards value or not. The guests in general are telling us, it's just -- it's 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's 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've done, we feel good about the development. But at the core, we have got to fix this menu and its orientation towards value. It's just not strong enough for the average consumer. And frankly, it's too big of a menu. So we have to do both, and that's the work that we're doing.

Your next question comes from the line of Will Slabaugh of Stephens Inc.

I wanted to ask more broadly about IHOP. Just wondering if we should expect some 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. And so, I think my involvement right now is critical to finish that work on the menu, the reengineering, the work we're doing on advertising, working with the franchisees. So I would 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're doing a terrific, terrific job and the plan is there. But I think my involvement will only make that faster and better.

Yes, makes sense. And then on the new marketing strategy that you mentioned earlier at IHOP. Last quarter, you talked about this in an earlier -- in your comments, clearly a work in progress, but that you have some new data around that, about how it's been resonating with the guest. So I didn't know if you happen to have any of that at your fingertips.

The advertising?

Right. They're running a new marketing strategy at IHOP, and how it's been resonating with the guest?

Yes. We -- it's 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 at -- 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're just doing that testing, by the way, on Applebee's, has been off the chart. By far the best scores that we've ever received at IHOP since I've been involved. So I feel really, really good about that. It's just not enough to necessarily turn interest into visits because we've 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 of itself isn't enough, I've got to give people a reason, and that's that menu work, that we are moving as fast as humanly possible on -- franchisees have been terrific about volunteering to testing. But, you got to do enough testing to make sure you're not going down a wrong path. So we've been doing more testing, I think, in the last 60, 90 days and for the balance of this year and early into next year than we've done in a long time. So it's good work, but it's just too soon.

Makes sense. And just lastly, a quick housekeeping question. Your mission check was higher at both concepts. I'm wondering 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 case, it's -- well, Applebee's is more of mix, it's a little less on average check. Traffic was basically flat. On the IHOP side, it's been more pricing and less mix, so, and then traffic is slightly negative. So we have a real opportunity there on both brands.

Your next question comes from the line of Peter Saleh of Telsey Advisory Group.

I was hoping you guys could give us a little bit of color on what you're thinking of for commodities over the next, maybe 6 to 12 months. I know it doesn't necessarily impact the bottom line all that much, but just your thoughts on where commodity should be trending? And how things have changed, maybe in your conversations over the past couple of weeks or months?

Well that, like we say, we read the same things that you do, and all indicators are that they're headed upward in terms of the 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's 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 2?

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've seen -- and by the way, that inflation for Applebee's, well I think we said -- 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's for 2012. There's 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's 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's 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 U.S. 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 center, that puts real money in the pockets of franchisees who have that consolidation. So we're hoping that some of this consolidation of DCs offsets anything that may happen. But pricing, absolutely on the Applebee's side, more problematic on the IHOP side. But the good news is, they're reversing their trend. Last year, IHOP had a higher forecast for increases. This year, it's more flat. So the good news is, they shouldn't have to price right now, unless there's something dramatic that comes of this drought that I just -- I can't predict.

Your next question comes from the line of Reza Vahabzadeh of Barclays.

Reza Vahabzadeh from 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 mix on the -- I'm guessing on mix, but I don't really know that much on the mix side.

Got it. Still -- 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 competitive environment? And what do you think wasn't working as well as you would have liked to?

You're talking about this last quarter?

Yes, second quarter, yes, for Applebee's

Yes, there's no question that the economic headwinds definitely hurt us, especially at Applebee's. I mean it's been an interesting lumpy, bumpy time, but I think the work that we're doing at Applebee's, I feel very good about. By differentiating ourselves, new and innovative programs, real price value, we just need more of it. I don't think there's anything I would necessarily change, the remodel's resonating, I mean, we're 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's 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 compliment 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's really the work that we are maniacally focused on at Applebee's on lunch, dinner and late night. Very focused on those 3 distinguishing day parts and what we are going to do definitely. There, if you recall Ryan's question earlier on the IHOP side, I think it's 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's 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 the 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's physically impossible. There's a 185 menu items at IHOP and 365 franchisees. It won't work that way. So we're going to do it in pieces and parts. So you're going to see continual evolution of the menu for the next 18 to 24 months. Your -- every time you go in at IHOP from now until certainly the end of 2013, you will see ongoing changes by section. I just -- it's too much work, it's too overwhelming. Frankly, forget even our team members and franchisees, it's too 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're focusing there first and then we'll get throughout. So think of us, you'll see some featured menu items on those handouts in third and fourth quarter this year, then you'll start to see the evolution and engineering, starting at the beginning of 2013. And right now, we've scheduled at least 3 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's doable with the franchisees. And the guests like it that way. It's not overwhelming.

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

We're looking that up. While he's looking, I'll talk. I do know historically there have been highs and lows on that. So he's 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.

The next question comes from the line of Bryan Hunt from Wells Fargo Securities.

This is Kevin McClure in for Bryan. Our questions have been answered.

Your next question comes from the line of Carla Casella of JPMorgan.

This is Paul Simenauer on for Carla Casella. I just wanted to ask you some follow-up questions on your capital structure. First, I'm just wondering what your target leverage was. I think you mentioned you were looking to get down to 4x. So I just want to see if that is where you're kind of like targeting capital structure?

No, we've never issued a target structure. We've 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've actually never given a target number.

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

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

Yes, and we expect to get to 4.x, 2013, not 4.0

Yes, we never said -- we just said they'd have a 4 on it.

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

Better think about it as 2 things. It's the proceeds that we're getting out of these transactions, right, as well as just ongoing free cash flow. If you add those 2 things up, you just, at some point in 2013, get to a 4 in front of your leverage ratio.

So we don't have a target.

No.

Your next question comes from the line of Jeff Farmer from Wells Fargo.

I do realize that it's been less than a month since you introduced the See You Tomorrow campaign. But in your early feedback that you've seen in that month that it's been out there or even from the testing perspective, anything you're willing to share with us?

We've definitely seen that the message is resonating with guests. People like the new advertising. I -- 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's some the best food photography, both brands have ever, ever, ever done. It's fabulous. I think it's definitely resonating, it does takes 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's a work in progress. Certainly early results indicated, it's just resonating with guests. But to the degree, that takes time. And I think all of the other work that we're doing in combination with that, is where it really takes hold.

Got it. And then just a couple of 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 is a situation where you might have even faced a greater same-store sales headwind if you did go dark?

No. No, both brands switched agencies, and when they switched agencies, they literally -- remember, that's 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's a couple of weeks during the year that go dark, but there wasn't anything unique. And 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 miss a beat, if you will.

Okay, and then sticking with Applebee's, how many times a year are you updating the 2 for $20 or refreshing the 2 for $20 menu? And what historically has been the impact on either the mix or the sales for our components, for it?

It's historically been at least a couple of times a year, maybe 2x a year, where we advertise it. But we also change it in store and don't necessarily advertise it, so it's at least a couple of times a year where we actually update it for new items. And 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 just a final question, really on the remodel. So you have 100 plus year-to-date in '12, and I'd understand the nice, sort of same-store sales tailwind that would be derived from that. But we go back to last year, and looking at my numbers, there's roughly 350 remodels completed in '11, 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?

A great a 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. That make sense?

It does. And then I did -- I sort of lied to you, maybe just one more sneak in, on IHOP. So it sounds like 7 for $7 menu that, that thing's got limited lifespan moving forward, that's the type of stuff you're going to track. Obviously, that was your initial foray into that sort of deeper or more called out value or overt value. It sounds like that's not resonating the way you'd expected it to. So some other variation of a value menu, we should expect sometime, would it be as early as '12 or getting into '13?

I think you -- the way you should think about this is, the first part of your comment is fair. 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's 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 items or what's on television. You have a value proposition inherent to it.

Ladies and gentlemen, we have time for one more question. [Operator Instructions] Your next question comes from the line of David Kuritsky of Apollo.

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

Where are we in the revolver?

Total amount, $75 million.

Is all of that available to us now?

Where were we at the end of June. I know where we were as of last week.

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

Sure, no problem.

I think I have the balance all paid down.

I do too. I thought it.

Yes. It is.

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

We'll check that though.

Yes. If there's an issue, we'll 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.