FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Applebee's International, Inc.
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100 Fox Hill Place, 4551 West 107th Street
Overland Park, KS 66207
(913) 967-8196

UNION CITY, CA (May 18, 1997)/FOOLWIRE/ --- Applebee's International reported their first quarter 1997 results on May 6th. In a very strong operating environment Applebee's size, momentum, focus, and strength continues to allow them to perform strongly against their competition and, in many cases, outperform their major competitors.

REVENUES. Their total revenue base grew 23% to $116 plus million comprising $100.8 million on company restaurant sales and $15.4 million of franchise income. On the company restaurant sales, which grew 22% from the prior year, that was composed of $79.2 million of Applebee's concept sales, $18 million of Rio Bravo sales, and $3.6 million of specialty restaurant sales. The Applebee's system sales for the company were up 20% while Rio Bravo grew 35% to give them the composite of 22% growth. They continued their strong earnings growth, up 30% to $10.9 million in the first quarter. They reached a first quarter milestone for Applebee's restaurants of $100.8 million in sales -- the first time in the history of Applebee's to top $100 million in company sales in any quarter.

NEW OPENINGS. They opened two new Applebee's company owned restaurants in the quarter as well as 3 company-owned Rio Bravos. Pre-opening costs were consistent with historical figures with $65,000 for the Applebee's units and the Rio Bravos came in at slightly less than the planned $150,000 per unit. On the franchise side they had 24 Applebee's and 5 Rio Bravo openings along with the same same-store sales performance. They finished the first quarter with 844 Applebee's open, 695 franchise and 149 company-owned, and they opened 26 Applebee's restaurants in the quarter. As of May 6th, they now have 855 Applebee's restaurants open -- made up of 694 franchise and 161 company stores. Reflecting on those numbers, it takes into consideration the St. Louis acquisition which is reflected in the change in company and franchise mix. The Applebee's pipeline continues strong, with 35 restaurants under construction and 81 franchise sites approved for construction as of April 27th. With their 1997 initiatives for the Applebee's concept and at a time when many of their competitors are cutting back on expansion, they and their franchisees plan to continue the rapid growth historically associated with Applebee's.

COMPARABLE SALES. System-wide comparable sales were up 2.6% made up of 2.1% for company and 2.7% for franchisees. Remember, however, that first quarter 1996 was impacted severely by adverse weather in the first half of the 1996 quarter and relatively good weather in the second half of the first quarter to finish down 1.2% overall. The remaining quarters are anticipated to be more normal and they would expect their flattish trend to return. The company was asked to comment on the fact that franchise comps were higher than company-owned comps. They responded that they have historically had an inverse relationship on that. On the company side they are quite pleased because their expectation for the year continues to be flattish (up or down about 1%), so they exceeded that for the first quarter. They think it is important to note that on the franchise side, everyone continued to perform strongly. Apple South commented that they were quite pleased with their sales performance in the first quarter and they should be. Applebee's International was quite pleased with it too and it had a big impact on the overall franchise comp sales.

PROMOTIONS. During the first quarter this year they ran two full promotions -- the "Break for Steak" promotion and the lunch promotion. This is part of their new strategy of 6 advertising campaigns during 1997 compared to their typical four. Last year they had one complete promotion, an Asian promotion, and a portion of a second promotion, the pasta campaign. They think having two full promotions this year positively impacted their sales.

HIGHER MENU PRICES. As they mentioned in the last conference call, their strategy was to raise menu prices modestly to cover the minimum wage increase in the fourth quarter as well as some selective-market, selective-item increases. They did that in the fourth quarter, staggered during the quarter, and this quarter was the first full quarter with the new prices in effect. That did accomplish their objectives of offsetting the minimum wage increase which they expected to be up to 100 basis points on the topline, and they covered that plus a marginal amount for a total increase of somewhere between 1.5-2% on the topline. Their strategy on pricing for the remainder of the year on company-owned stores is to remain tight on pricing, not take further increases.

APPLEBEE'S SALES VOLUMES. They are very pleased with first quarter system sales up 24% to $439 million. They are also pleased with first quarter opening sales volumes of new restaurants and average unit volumes which are up 3.4% ($40,900 per unit) for company and 1.2% ($40,500 per unit) for franchisees with system-wide AUVs up 1.6% ($40,600 per unit) in total. Part of the company-owned AUV increase comes from the elimination of 6 company-owned California units that were sold to a franchisee in the fourth quarter last year. Factoring those out of the 3.4% increase, AUVs were up 2.3%, consistent with same-store sales of 2.1%.

RIO BRAVO SALES VOLUMES. On the Rio Bravo side, same store sales were up 2.2% and average volumes were $63,000 per unit. The company was asked to comment on the decrease in average weekly sales at Rio Bravo restaurants. They responded that it comes from a couple of reasons they can speak to. They opened 8 restaurants last year and about 7 of those were after the 1996 quarter ended and 5 of them were in the fourth quarter and were in Minnesota and Michigan, so they opened at the worst possible time in terms of seasonal trends for Rio Bravo, they opened outside of their home territory and expected similar volume, and a couple of them were conversions. They didn't do what they intended to do on the marketing side, so the conversions didn't get the headlines that they had gone from a Chi-Chi's to a Rio Bravo as they should have and that is something they have to improve on. The core Rio Bravo units in the Southeast in the first quarter this year performed at almost $57,000 per unit, very strong given the time of year. This is not, given the seasonality, outside of what they would expect.

RIO BRAVO MEETING EXPECTATIONS. Their Rio Bravo Cantina concept continues to meet their expectations, with total company sales up 35% and their Rio franchisees continuing to show strong support for the concept. At the end of the quarter, Rio had 38 restaurants open, 24 company and 14 franchisee, reflecting the opening of 8 restaurants in the first quarter. They opened one additional franchise restaurant in April to bring that up to 39 restaurants total.

FRANCHISE FEES. They were asked whether they will break out franchise fees for Rio Bravo, and what franchise fees they get for international units. Right now you can back into what the fees are because it is $40,000 a unit for each Rio Bravo opening and you know the number of units. As the base of sales grows, they will probably start to split out the system sales on Rio Bravo later this year but they think it is a little early now. Development fees for international are not significantly higher than domestic ones. That is an opportunity they will be reviewing very shortly. They have not standardized it as they have with Applebee's and it depends on the country and in many cases is tied to sales volumes of the individual unit and is tied to the number of units. But, generally speaking, it is not less than 4% and in some cases it is higher, around the 5% mark is about the highest they have ever gone in any country. Each of the countries has an individual franchise agreement. The fees come to them in dollars, so there is no foreign exchange issue. They have built the existing franchising agreements to cover the fact of the increased G&A they have to incur to train and support the initial restaurants overseas.

INVESTING TO IMPROVE. They continue to invest in their future while enhancing their unit efficiency and improving their consumer appeal. They feel that their dominance in their industry, their size, strength, and marketing initiatives will allow them to continue their sales and EPS momentum in 1997 during a continued competitive environment.

FOOD & BEVERAGE COSTS. Food and beverage costs came in at 27.5% in the first quarter, down significantly from 28.3% last year. They are pleased with a number of things on the food side, the biggest is the comparison to last year when they had higher food costs during the bad weather. But also a lot of the initiatives they continue to put in place for managing their kitchens and managing their food usage through purchasing efficiency have come into play. They had some impact from the pricing flow-through that favorably impacted them on the food cost line. Certain offsets there is with the steak promotion in the first 6-7 weeks of the year. It ran a slightly higher food cost so they are quite pleased with the overall result given that.

LABOR COSTS. Total labor cost was 31.8% during the quarter compared to 32.5% in the prior year, a decrease of 0.7%. They are pleased with the favorable comparison which was driven in large part by the bad weather last year. During that 6-7 weeks of bad weather they had a tremendous impact on labor due to the last-minute staffing that was required. Their improvement comes primarily from that, with some offset on the positive side from the elimination of the California units. The important thing to note on labor is first, they are pleased with the comparison to prior year but also encourage people to look at the 31.8% versus their run rate of the last 2-3 quarters in 1996 of 31.2-31.3%. In the first quarter of every year, their payroll taxes run higher than the rest of the year. This is driven by unemployment taxes which, depending on the state, run on the first $4000-6000 of wages of each employee. Historically, and again in this quarter, payroll taxes in the first quarter run about 3.7% of revenue. The increase in the first quarter this year and last year versus the latter three quarters is about 0.3-0.4%. Factoring that back out of the first quarter, labor costs are pretty consistent with the last 3 quarters. They are very pleased with the underlying trend on hourly labor, especially given the minimum wage increase in the fourth quarter. That is running consistent in the first quarter with what it did over the last 3 quarters. Management, while running pretty consistent, is up slightly accounting for the rest of the pro forma difference, primarily because they have staffed heavily in the first quarter for their upcoming openings, they have 35 company openings planned for Applebee's this year, 33 yet to come.

DIRECT AND OCCUPANCY COSTS. There are two items to note here -- advertising and depreciation. They are up 100 basis points in direct and occupancy from last year at 25.8% versus 24.8% in the previous year. During the first quarter they had two full promotions this year for the first time. That has resulted in more of their advertising costs coming in the first quarter as they anticipated. They contribute 1.5% on an annual basis to their national funds and another 2.5% of local advertising for a total expected advertising level for 1997 of 4% of sales, consistent with 1996. They have historically had higher advertising in the first half of the year based on the layout of their promotions and that has been increased this year by adding the two new promotions, one of which falls in the first half. As a result, their advertising on local was 3.2% in the first quarter, up 70 basis points from last year's first quarter. They expect that to flatten out over the course of the year to fall within their goals and historical run rates. They expect the second quarter to run higher at about 3.5%, consistent with last year. The other 0.3% of the increase comes from the ongoing effect of depreciation which is up 0.4% versus prior year. This is a combination of more Rio Bravo openings coming into the mix because they have a higher construction cost and impact the overall depreciation. Also, as they continue to have a larger base of newer Applebee's units with a higher cost component than the historical cost component of 4-5 years ago, that also has an impact on depreciation. They expect in the second and third quarters some one-time expenses related to rolling out their new menu and food presentation and that should equate to about $400,000 to $500,000 of one-time costs in each of the second and third quarter for new plateware and chinaware. After the second and third quarter, the cost component of that particular piece of their business should remain the same as it always has in direct and occupancy.

GENERAL & ADMINISTRATIVE COSTS. General and administrative expenses came in at a continued leveraged percentage of 10.7% against 10.9% last year. Total dollars increased 20%. That is all consistent with their expectation of leveraging G&A down. As they go farther into the year they expect that percentage to continue to come down on a quarterly basis approaching 10% late in the year.

CAPITAL SPENDING. Capital expenses in the first quarter were $16.5 million and that includes the buyout of their joint-venture partner in Nevada in the first quarter. That accounted for $1.2 million.

INVESTMENT INCOME. There will be a change in the second quarter on in terms of investment income. They closed on their St. Louis acquisition in April, after the first quarter, thereby reducing their cash balance by about $34 million. So, the interest income will be lost on that money, offset by more than the profits coming in from the restaurants.

TAXES. The tax rate continues at 37.4% of pre-tax income. Net earnings were $10.9 million against $8.4 million the prior year, an increase of 30%, while revenue at the topline increased 22%.

ST. LOUIS ACQUISITION. The St. Louis acquisition did close in the middle of April. That brings on 11 existing restaurants from that franchisee and one that opened after the closing in late April. So, they now have 12 restaurants in that very strong market -- very high unit volumes and average weekly sales -- and they expect that very strong performance to continue as they brought over the entire management team at the multi-unit level. There are some select opportunities out there for them in terms of additional acquisitions. They have, in their planning process, developed a grid or matrix that weights and prioritizes key components such as "does it bring management," "what's the proximity to existing management," "does it have development potential left," "what are average unit volumes and margins," etc. and there are some opportunities left. They are not interested in buying back every franchise operation that a franchisee wants to exit. Those will be done on a selected basis.

CASH. Cash balances at the end of the quarter were $64 million liquid assets. $34 million of that was expended post-quarter. Along with their revolving credit facilities, the $30 million remaining should be more than adequate to fund their needs in the foreseeable future. Total debt is minimal, around $23 million. As far as what they will do with the cash, they still have quite a few openings to accomplish for the year. Their full year expectations is to spend $120-125 million. Their excess cash, if you project out, is really more in the future years and they will continue to reinvest in their restaurants on a rennovation program, continue to build technology, continue to build new restaurants. To the extent there is extra cash they will look at other ways that can be used. Down the road, some day, they may look at another concept and certainly acquisitions are part of their strategy.

EXPANSION. On the expansion side, they continue to expect 35 company-owned Applebee's this year and 100+ franchised units on the Applebee's side. The new openings on the company will be the two in the first quarter, 6 in the second quarter, 15 in the third quarter, and 12 in the fourth quarter. On the Rio Bravo side, they continue to expect 9 company-owned openings and 18 franchise for a total of 27 system-wide. They actually opened one extra one in the first quarter this year with 3 so the recast expectation is 3 in the first quarter, 3 in the second quarter, 2 in the third quarter, and one in the fourth quarter for a total of 9.

INTERNATIONAL EXPANSION. In the international market, they continue to expand deliberately as they grow. They feel they are reaching a position to expand on that learning experience in the immediate future. Their recent hiring to head up their international growth confirms their commitment to international expansion. They also alluded at the meeting to having filled the position of President of their International Division. The individual's name is Larry Cates and for the last several years Larry has either been the number 3 or number 2 senior manager in Europe for PepsiCo restaurants international. Most recently, he was Vice President and General Manager of Franchising and Development having responsibility for operations in 31 countries including the Middle East, Central Europe, Southern Europe, North Africa, and Scandinavia. Applebee's is pleased to welcome him after an extensive search. They have 3 restaurants in Holland and 3 in what was formerly East Germany. The encouraging thing is that people are responding to the concept itself. While they are still in the early stages of development there, they ship a lot of equipment and some product from North America so there are costs there today that they expect to drive out over time as they grow the number of units over there.

STRATEGY INITIATIVES. They have 6 strategy initiatives that they believe will fuel them into the 21st century that include the Applebee's prototype. They have made it more current with guest expectations. It is more operationally effective, It is more user-friendly and more cost effective. They demonstrated Exceed, their new food project. They talked about world class service initiatives including their customer feedback loop. They demonstrated their information technology initiative and spoke of some of Rio Bravo's progress. They also spoke of some changes in their marketing approach. Relative to marketing, they were just introducing their new skillet campaign which included some new imaging or positioning which focused on "You Belong at Applebee's." They felt that this particular phrase seizes upon a notion of inclusiveness which they uncovered in their market research. While it is too early to speak to the results, they are happy with the look of the campaign and the feedback they have received so far. They also unveiled their small Rio Bravo prototype. They believe this building will facilitate penetration of smaller markets much like Applebee's. They have 20 franchisees now for Rio Bravo with development rights for parts of 32 states and a commitment that approaches 125 restaurants over the next few years. The strategy above all of those initiatives is unit penetration. The real beauty in their opinion, is that they can accomplish these enhancements this year while still maintaining their unit economics.

SUMMARY. They are pleased with their performance for the quarter, particularly in light of the continuing competitive intensity and the number of initiatives that they have undertaken and are executing extremely well. With their expanding system revenue, they are obviously growing market share, which is part of their strategy. In short, they feel they have size, strength, and momentum and that will serve them well.

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