Good day, and welcome to the DineEquity Quarter 3 2012 Earnings Conference Call. My name is Dave. I'll be your operator for today. [Operator Instructions] We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to like to turn the call over to Mr. Ken Diptee, Executive Director of Investor Relations. Go ahead, please, sir.

Good morning, and thank you for participating on DineEquity's third 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 releases, 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 we assume 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 releases 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 third quarter 2012 earnings call. We will provide supplemental details on this morning's press release, and then open the call up for Q&A. Before I begin, I'd like to highlight that we completed our transition to a 99% franchised company earlier this month. I am extremely proud of this unique achievement in the casual dining segment, and I'd like to thank everyone who played a part in helping us reach this very significant strategic milestone. I'm excited about our next chapter as a fully franchised restaurant company. Consistent with our practice of providing updated financial guidance after deal closures, we issued a separate press release today with updated guidance for 2012. With closures of the final 3 Applebee's refranchising transactions, we've reached the goals that were set when Applebee's was acquired in November 2007. So let me remind you what we talked about. We said at that time we would refranchise the company-operated restaurants and transition to a 99% franchised system. We have substantially lowered G&A by at least $50 million. We'd pay down debt and reduce our total debt by over $960 million since the acquisition. We'd reengineer the menu for profitability. We'd restore same-store sales restaurant momentum. We'd improve performance at the company-operated restaurants. We'd complete a sale-leaseback agreement for the 181 company-owned properties. We'd improve operational execution. We'd capitalize on the opportunity to reduce commodity cost and form a purchasing co-op. We'd implement a shared services model to deliver services more effectively and efficiently and make Applebee's #1 in the casual dining segment. And, ladies and gentlemen, we achieved all of those objectives. In addition, we've been at the forefront on creating popular value platforms such as the industry-first 2 for $20 and Under 550 Calories and Fabulous,…

Thanks, Julia. Good morning, everyone. I'd like to review some of the highlights of today's press releases. As discussed, we completed 2 refranchising transactions during the third quarter. The combined net after-tax proceeds from these sales was approximately $87 million, which was used to pay down debt. For the first 9 months of 2012, the total debt has been reduced by $256 million. And a reminder that the last and final refranchising transaction closed on October 3 and will be reflected in our financial results for the fourth quarter of 2012. At the end of the third quarter, our leverage ratio was 4.8x, down from 5.3x at the end of the second quarter. Let me remind you that our current leverage ratio is based on the latest trailing 12-months EBITDA. These results are core to our strategy of reducing the company's debt and diligently managing costs. Since the Applebee's acquisition in November 2007, our highly franchised business model has generated strong, stable free cash flow, which has enabled approximately $1 billion in debt reduction. The lower debt levels in the third quarter of 2012 led to a $3-million reduction in interest expense compared to the third quarter of 2011. Regarding income, for the third quarter, adjusted net income available to common stockholders was $18.9 million or $1.03 per diluted share. This is compared to $19.1 million or $1.04 per diluted share a year ago. The year-over-year decrease is due to the expected decline in segment profit as a result of the refranchising of Applebee's company-operated restaurants. This was partially offset by lower cash interest expense. On segment profit, our franchised segment profit was up approximately 4% over the third quarter of 2011. The improvement was primarily due to an increase in effective franchised restaurants due to the refranchising of Applebee's…

Thanks, Tom. To close, I'm pleased with the overall results for the third quarter. As I said earlier, we are executing on our 4-point plan to achieve steady traffic and sales growth at IHOP. We achieved all of the goals that were set when Applebee's was acquired. We further solidified our business model by completing the transition to a 99% franchised restaurant system. We continued to use our stable free cash flow and net proceeds from refranchising to significantly reduce debt. Looking ahead, while debt reduction remains a priority for at least the near term, we'll come back to you sometime in 2013 with details on our capital allocation strategy. It will take the next several months to execute on everything that we've laid out as we focus on the post-refranchising business and further reduce debt to be in a good position in 2013. I'm very optimistic about our strategy to drive performance at both brands and deliver the value to our shareholders. Our fundamentals are solid, and we are positioned for long-term growth. Now Tom and I would be pleased to answer your questions. Operator?

[Operator Instructions] And your first question comes from Will Slabaugh of Stephens Inc.

I'm just wondering if you could talk a little bit more about the IHOP franchise conference, just the general tone there, where they were happy, where they may have been a little disappointed and where they most collectively saw opportunity or wanted some change that -- like you mentioned earlier.

Yes, the conference was in Palm Springs and it was a record heat. So the -- beyond them being angry that I couldn't control the weather, it was -- on a normal day, it was like 110, all kidding aside. I think they came in -- I think it's a great question. I think they came in a little bit -- I don't know if skeptical is the word, but concerned. I think they left very reassured. The evaluations we've gotten back have told us they felt good about the fact that they believe in the plan. They think we can work the plan. As you know, just like at most franchised companies, they only -- they vote a group of people onto what we call a council, the franchise leadership council. They have a lot of space in that leadership council working with us day in and every day out on the menu, on the advertising. So I think they left pretty jubilant and excited about the opportunity and the future and believe very much in the brand. So I have not heard any negatives other than the weather.

Got you. And then, I wondered if you could also talk about just the consumer environment even, seeing, throughout the quarter, the ups and downs. And then any trend you may be able to speak to as you near the end of the quarter, September-October period, where a lot of your peers have been warning more or less some sort of softness and just general choppiness in the environment.

Yes. I mean, I've been quoted for the last couple of years. No one likes the statement, but I do think it's lumpy and bumpy. And I think the reality is -- I've said this now for a while. I think it's going to continue that way. I don't think the consumer is necessarily predictable, other than to say that value was at the top of the consumers' mind, frankly, in the family dining category and in casual dining category, and I think us playing to that value need is what we're very focused on. The good news is both brands have been value-oriented, but it's hard to predict. I think the lumpy and bumpiness is going to continue for a while.

Your next question comes from John Ivankoe. John is from JPMorgan.

Just a couple of questions, if I may. Firstly, I mean, it does look like the Applebee's comp guidance for the fourth quarter is very wide. You have been -- I think you guided to a fiscal '12 number and we're 3 quarters in. I mean, could you help tighten up an expectation, and I'm sorry if I missed this, for the fourth quarter on Applebee's comps and, maybe to the previous question, incorporate some thinking of where the business is currently trending into that guidance?

Yes. We never guide on quarters, and we don't talk about intra-quarter. I think we feel very comfortable with our guidance that we've issued. And as I said, and I think I said before, lumpy and bumpy, but we are comfortable with the guidance that we currently set at the beginning of the year for Applebee's.

All right. And I think -- I mean, if our numbers are right -- and again, I apologize if they're not. I mean, I think what we interpreted for the fourth quarter was something like down 2 to down 6 in the fourth quarter at Applebee's. Just using your annual guidance and where you are year-to-date, I mean, does that sound right? Or do I need to recalculate that number?

I'm not sure where you're getting that number. The guidance for Applebee's for the year was a positive 0.5 to a possible positive point -- 2.5. I'm not sure where you're getting your number. We guided at the beginning of the year on that. And as I said, we're very comfortable with that number.

Okay. I'm going to -- I'm just going to look at that year-to-date then again and rerun that number. And secondly, if I may, on -- for remodels in fiscal '13, what are franchisees currently committed to? And what kinds of sales lift are they getting for those remodels?

The -- on the Applebee's side?

Yes.

Yes. We've been saying now for multiple quarters that they're getting a single-digit comp growth number on the remodel, usually around 5%, 6%, pre/post net of control. And you can see from the trend, although we haven't guided for 2013, it's running about 25% of the system per year.

And I did -- hey -- and, Julia -- and I do apologize. I just -- did just relook the number. I think it was down 2 to up 6, I think is what we looked at in the fourth quarter. I'm sorry. I misread something, so I do apologize for that to go on the record. Not to present the wrong signal on the call. And then finally, regarding you -- I think you mentioned paying down debt. I mean, is that something that you are alluding to for fiscal '13? I mean, that -- that's continuing to be part of the plan for fiscal '13 as well, or are we finally at the point now with the refranchising largely finished and having a view on CapEx that you can begin returning cash to equity holders?

Yes. As I said in my prepared remarks, and we are all very comfortable with this, but in the near term, we'll continue to pay down debt. And then, as we said, we'll come back to you in 2013 with the capital allocation strategy. Not sure exactly when in 2013, but we will come back to you in 2013.

The next question comes from Jeff Farmer of Wells Fargo.

I'm just trying to better understand your key advertising efforts with Applebee's. Specifically, how many weeks do you think you'll be on the air in 2012? And how that number would compare versus 2011?

Doing this off the top of my head, Applebee's is on almost 52 weeks a year. It has been for some time. So there is no inherent, large difference between 2011 and 2012 on the Applebee's side.

Okay. So that was sort of leading into this question, so that does make sense. But as it relates to, I guess, the 2 for $20 weighting, would it be a similar level of promotion for 2 for $20 in '12 versus '11? Or have you guys had to amplify that a little bit considering what's going on in the environment out there?

Yes, but we don't necessarily do 2 for $20 at the same time year-over-year. We do, do 2 for $20 on television a couple of times a year. The weight levels have been pretty consistent year-over-year. There isn't any dramatic difference, but when we choose to do isn't necessarily lapping the same time year-over-year, if that makes any sense.

Sure. And then, I might be mischaracterizing this a little bit, but I think late night was one of your better dayparts in terms of same-store sales momentum over the last few quarters. It sounds like that's sort of fallen in line with the consolidated same-store sales number. Now you're talking about lunch a little bit more. What's the sort of incremental opportunity at lunch? And can you sort of explain the advertising efforts around further driving that lunch daypart?

Yes. We've talked for quite a while now that our goal is to focus different media on lunch, dinner and late night. So that really hasn't changed. So late night is done more through local marketing and digital space, and we've done lots of work in that arena. Dinner is largely television. Historically, lunch has been radio and other forms of media, and we're looking at exploring some other opportunities, including digital. But we focus each of the dayparts on a different strategy from a media standpoint. And we also see that when we go on television, if we tag the commercial for late night, we've also been very successful in that regard. So each of the strategies around each of the dayparts gets sort of a different media mix, if you will. And we've had that now for, gosh, I want to say 1 year or 2.

Okay. And just one more, if I can. So refranchising is obviously complete now. As we look forward into '13 and '14, are there some rough parameters as to how should we think about G&A growth versus revenue growth on a consolidated basis?

Yes. We're going to guide in early 2013 on all of 2013, so we'll certainly give you those G&A numbers. We've historically always said that our G&A is never going to grow as fast as our comp sales or vice versa, right? Our G&A will always grow slower than our comp sales. But the exact numbers, we'll give you that for 2013 in our guidance.

Your next question comes from the line of Bryan Elliott at Raymond James.

Kind of back to the Applebee's sales question, if I may. Maybe ask, is there any reason to not -- or that you would expect Applebee's not to gain share again in Q4 given all the concern about the, sort of, static industry demand environment. I think that's what people are looking for just a little, your view on where Applebee's is competitively and whether you think there's any reason why it would stop gaining share in Q4.

Yes. I guess, because we were so comfortable with the guidance, that's where we started with. I mean, that's -- it's a good question, Bryan, but we were so comfortable with the guidance, which again was 0.5 positive to 2.5 positive. And what's in fourth quarter? Well, it's the sale of gift cards; it's the continuation of all the work we've been doing in each of the dayparts. So that's why we were so comfortable with our guidance.

Well, except that -- again, I mean, we can talk about it off-line, but your guidance is so wide that it's -- it creates discomfort or lack of...

You know what? That's easy to say. We're in the middle to the high end of the guidance. I mean, that's easy to say. We're not going to be at 0.5.

Yes, okay. That's okay. That's...

Sorry about that. You're right. You're right. I see what you're saying.

So on the late night, how big an opportunity is that? It seems to me it might be significant, and was it -- and just to confirm, it was not an outsized driver of comps this quarter, correct?

Yes, the dayparts were pretty equal this quarter.

But it's just been rolled out. You're putting some more effort behind it. Can you maybe give us some anecdotes of what some of the folks who were testing it saw, and how big opportunity might be? It's -- we really don't have a comparable to look at here in the public markets. Instinctively, it would seem like it could be a brand-new bolt-on business that could be quite meaningful. So if you could give us a little of your thoughts on that, I'd appreciate it.

Yes. The notion of marketing the late night, we've been doing for about 2 years now with different programs, very locally based, that different franchisees could do. Monday night is girls' night out, Wednesday night is football night, Thursday night is karaoke. That work has been very successful, along with the tagging of the TV spots. Recently, one of the franchisees tested this concept of the bees -- the bar bees [ph], and you've seen some media interest in that, which is a little more aggressive in the late night daypart. It doesn't start till 10:00 at night, but it provides an opportunity. That is not a system-wide thing yet. So certainly, there's some opportunity but we have to obviously manage that and find the right balance in our own brand and in our own culture, and that's what we're looking at. So certainly, there's an opportunity. Maybe the better way to think about it is, when we made the acquisition, the mix was 12% liquor, one of the lowest in the entire industry. Today, at 14%, we're pretty much in the middle of the pack. But certainly, there is some opportunity. I don't see us being a 20% mix for liquor. As a company, I don't see that in our brand. And certainly, as you know, we're considered a family restaurant. We don't see ourselves going all the way to 20%. But is there opportunity? Absolutely. Closer to 16%, I think I said on the last call, is probably a good place to be. So, yes, there's opportunity, but it's certainly going to take a while.

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

This is Kevin McClure standing in for Bryan. Most of our questions have been answered. But, Julia, one macro question for you. In your conversations with franchisees, what are the things that you continue to hear about, things that they're looking at in 2013 that gives them concerns? Is it the fiscal cliff, local economies, the impact of health care reform? What do you continue to hear as a major theme?

I'd say #1 is wait and see who's going to be president of the United States. I think they talk a lot about that. I think they talk a lot about what's going to happen to taxes, all that stuff really. I think they talk a lot about ObamaCare and the implications. We're doing a lot of work with our franchisees. We've done, I think, a terrific job at both the conferences of bringing in outside experts to help them understand ObamaCare to the degree that we now know the regulation. We've done a good job with that. And obviously, commodity costs. I mean, I think they worry about the same things, frankly, that everyone worries about and being able to put that in an order of magnitude. But I think both brands' franchisees are still very bullish on their brands and the future. I -- there really isn't anything that I think people lose sleep over, but I think these are the things -- the governmental regulation -- that they're most concerned about, things out of their control, if you will. Remember, all of the franchisees belong to the co-op, and so they have sort of not only a fiscal accountability, but they have a desire to do as much as they can in the co-op. So there's a real focus on what additional things they can do to help offset inflation. And so there's a lot of focus on that right now.

And, ma'am, you have no further questions at the moment. [Operator Instructions]

So we want to say thank you very much for joining us this morning. Our fourth quarter reporting for the next reporting date will be February 27, 2013. If in the interim you have any questions, you should feel free to call Ken or Tom and -- or myself. We hope all of you that are in the Northeast are safe and sound, and have a great day.

Thank you very much. Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.