Dine Brands Global, Inc. (DIN) Q3 2013 Earnings Report, Transcript and Summary

Very good morning, ladies and gentlemen. Thank you very much for joining us. I would like to welcome you to the Third Quarter 2013 DineEquity, Inc. Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. I'd just like to advise you that today's conference is being recorded. [Operator Instructions] I'd now like to turn the conference over to Ken Diptee for opening remarks. Please proceed. Thank you.

Good morning, and thank you for participating on DineEquity's Third Quarter 2013 Conference Call. Today, I'm joined by Julia Stewart, Chairman and CEO; Tom Emrey, CFO; and Gregg Kalvin, Corp Controller. 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 substantially different than those expressed or implied in such statements. We caution you to evaluate such forward-looking information and 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 SEC. The forward-looking statements made today are made as of this date and assume no obligation to update or supplement these statements. Additionally, we may refer to certain non-GAAP financial measures, which are described in our press release and also available on DineEquity's Investor Relations website. With that, I'll turn the call over to Julia Stewart, Chairman and CEO.

Thanks, Ken, and good morning, everyone. I'd like to welcome you to our third quarter earnings call. And as you saw on our press release this morning, we reported strong results for the quarter. I'll briefly comment on the highlights and then Tom will provide a financial review of third quarter's results. Following our remarks, we'll open the call up for Q&A. We have a lot to cover, so let's get started. Our performance this quarter reflects our strategy to further differentiate both brands from the competition. I'm pleased to say that both Applebee's and IHOP continued to outperform their respective categories based on domestic, systemwide same-restaurant sales despite the continued challenging economic environment, which has created consumer headwinds. During the third quarter, we completed over $10 million in share repurchases and paid a cash dividend of $0.75 per share of common stock. In 2013, DineEquity returned roughly $68 million to our stockholders through a combination of share repurchases and cash dividends. We remain financially disciplined, managing G&A and reducing interest expense. Now I'll shift gears and briefly review the highlights for the third quarter, starting with IHOP. Over the past year, I discussed with you the strategy that we've implemented at IHOP to drive consistent and sustainable positive same-restaurant sales and traffic. We are executing on the 4 pillars of our plan, focusing on menu innovation, operational excellence, advertising and media and our value proposition. And while we still have more work to do, our strategy has yielded some promising results and we are building momentum. We are continuing to further develop plans to expand our reach to target audiences. I'll provide additional details shortly. Turning to the third quarter's results. I'm very pleased to report that IHOP same-restaurant sales were positive for the second consecutive quarter, increasing 3.6%, which is the largest gain since the first quarter of 2008. The improvement in third quarter sales reflected a higher average guest check, largely due to favorable changes in product mix. The new menu's improved layout, which offers better visibility, prompted guests to trade up and also helped to increase the sale of additional items such as appetizers. The combination of an improved menu and innovative items, a focus on operational excellence and an effective marketing strategy has allowed us to develop a solid platform from which we can continue to grow. The new menu, which was launched last June, and our new featured items continue to have a positive impact systemwide, both on consumers' likability and on execution in the back of the house. And most importantly, we have developed a menu that sells and is easier to navigate. We began to see a favorable change in consumer behavior, whereby guests were making additional purchases and self-selecting higher-priced items that may not have been noticed before. We've also identified opportunities to improve day part sales mix by introducing new and improved menu items throughout the year to attract guests across all day parts. Guests responded to our franchisees' commitment to operational excellence, which has resulted in higher Voice of the Guest scores. In fact, all measures reached a new peak last month. There continues to be an intense focus on the employee training program that was introduced last year. We also implemented a more stringent internal rating system to support the restaurant's efforts to achieve high levels of consistency with IHOP service and production standard. An effective marketing strategy is an important part of our approach to drive new traffic to our restaurants and to encourage more frequent visits from our existing guests. In addition to evolving our media strategy to maximize our spin through an improved buying process, we're also very active in social media, creating yet another valuable touch point for our guests. On Twitter, #IHOP is the #1 ranked term in the entire food category, and IHOP.com receives about 1 million guest visits a month. Our vision entails capitalizing on IHOP's strength and the opportunity to break the mold and broaden our appeal across core users and key growth demographics. Additionally, we're working with several of our key franchisees on developing the next phase of the IHOP remodel program, which we believe will further enhance the appeal of our restaurants. On development, we're also expanding our international footprint in Canada, the Philippines, Mexico and the Middle East. We review all international strategy -- we are reviewing our international strategy on an ongoing basis, but the real focus for us is on the countries that we are currently in. As I've said before, this is a growth opportunity. We're continuing to expand our footprint into incremental locations. Earlier this month, IHOP opened its first airport location at Hartsfield Jackson Atlanta International Airport. The IHOP Express, which is ideally situated in the main terminal, marks an important step on our continued expansion into nontraditional venues like airports and colleges. Our strategy is to accelerate growth while extending the reach of the IHOP brand to more audiences, and these development plans are key to achieving those objectives. Now I'll turn to Applebee's results for the third quarter. Applebee's domestic systemwide same-restaurant sales were down slightly in the third quarter. And while our traffic was soft, I'd like to highlight that we outperformed the overall category once again. This is a testament to the strategy that we have in place as the dedication of our franchisees. We are certainly not satisfied with the results, but will continue to work hard to drive consistent and sustainable positive same-restaurant sales and traffic. We believe the key reasons for the sales outperformance this quarter were due to our compelling advertising and marketing messages, consistent and superior operational execution, our dedicated franchisees who continue to invest in remodeling their restaurants and our understanding of what our guests want in each day part. We have listened to both our franchisees and guests and it's clear that there is a need to continually evolve the brand. This includes enhancing our service platform, testing menus that are engineered to create additional value, as well as using technology to provide guests with more control of their dining experience. Our plan has shown results. Since the beginning of this year, our overall guest satisfaction score is up. We also saw improvements in the areas of likeliness to return and server caring for the guest. Clearly, we've done a lot to refine Applebee's over the last several years to retain the top spot in casual dining. Our franchisees have remodeled their restaurants with approximately 66% of the domestic system having the new look at the end of third quarter 2013, and we're targeting completion by the end of 2014. We've developed and introduced new menu items that are fresh and easy to prepare. We've evolved our advertising approach, and we've committed to reinvigorating our bar business by updating our offerings. And more recently, we've launched a joint venture with ESPN, the worldwide leader in sports coverage, to debut ESPN Fan Zone at Applebee's restaurants across the country. The partnership creates an exciting and unique new environment for guests to enjoy their favorite teams and the wide selection on our menu. We've made significant process -- progress, excuse me, with testing innovative new techniques to integrate consumer-facing technology at Applebee's. To remain the leader in casual dining, we are continually looking at ways to evolve the guest experience. As I said earlier, we're thinking about how to reinvent casual dining in both the front and the back of the house. There is no doubt we are in a period of evolution and change. We are not only updating the exterior and interior of the restaurants, but challenging the service model as well, especially at lunch. Regarding franchisee development, we've reduced our 2013 outlook for Applebee's. We're certainly not satisfied with the pace of development this year. And for the past few years, franchisees have allocated a significant amount of capital, both human and financial, to the remodel program. We underestimated the time it would take to rebuild the development pipeline. In addition, several of the franchisee-to-franchisee transactions that were completed in 2013 had development obligations that were extended as part of the deal. To close, we are encouraged about the ongoing success of our strategy, the dedication and hard work of our franchisees across both brands and the progress we're making to drive consistent and sustainable, positive same-restaurant sales and traffic at both Applebee's and IHOP. We are continuing to make great strides on foundational improvements and brand innovation by leveraging our shared services platform. And our stockholders are seeing the benefits of our business model. I look forward to talking to you in the months ahead about taking our work to the next level. And with that, I'll turn the call over to Tom Emrey, our CFO, for a review of our third quarter financial results. Tom?

Thanks, Julia. Good morning, everyone. By now you've had the opportunity to review the press release we issued this morning. We'll review some of the financial highlights on our guidance. We reported third quarter adjusted EPS of $1.10 per diluted share compared to $1.03 per diluted share for the same quarter in 2012. I'd like to highlight that this includes the positive impact of approximately $3.8 million in nonrecurring cash termination fees related to the previously disclosed bankruptcy filing by an Applebee's franchisee in the second quarter of 2013. G&A expenses were $35.3 million in the third quarter of 2013, down from $48.7 million in the third quarter a year ago. The decline was mainly due to a nonrecurring charge that occurred in the third quarter last year of approximately $9 million related to the settlement of litigation that commenced prior to our acquisition of Applebee's in 2007. Excluding the nonrecurring charge, third quarter G&A declined approximately 11% year-over-year, mainly due to lower personnel costs from our G&A restructuring and refranchising initiatives implemented in 2012. As we discussed last quarter, G&A for the second half of 2013 is expected to be higher than it was for the first 6 months of the year. This is driven mainly by the timing of various expenses such as franchisee convention, compensation costs and additional consumer research. In the fourth quarter this year, we expect higher compensation costs in addition to the timing of the expenses in various categories. I would like to highlight that the fourth quarter 2013 will be the first period in which the P&L reflects essentially the same number of company-operated restaurants as in the same quarter last year due to the completion of our Applebee's refranchising program. We will continue to prudently manage G&A in order to deliver meaningful savings. Regarding free cash flow, in the first 9 months of 2013, we generated free cash flow of $98.6 million. With this amount, we have returned approximately 69% to our stockholders through the combination of cash dividend payment and share repurchases. Turning to capital allocation. We repurchased approximately 151,000 shares or $10.2 million of our common stock during the third quarter. Year-to-date, we have repurchased roughly 352,000 shares or $24.7 million of our common stock, and we have paid out over $43 million in cash dividends this year. Our cash balance, as of September 30, 2013, was $95.5 million. This compares to $71.8 million a year ago. The cash balance at September 30 was higher than at June 30, primarily due to the timing of semi-annual bond interest payments, principal and interest payments on our term loan and when we record IHOP rental segment payments this year versus last year, all of which have occurred or will occur in the fourth quarter of 2013. And finally onto our revised guidance for the year. Applebee's domestic systemwide same-restaurant sales are expected to range between minus 0.5% and plus 0.5%. IHOP's domestic systemwide same-restaurant sales are expected to range between plus 2% and plus 3%, reflecting a continuation of IHOP's positive momentum. On unit development, Applebee's franchisees are now expected to develop between 25 and 30 new restaurants. And profitability-wise, we revised guidance on our business segments. Franchise segment profit is expected to range between $329 million and $331 million, driven mainly by higher termination and transfer fees at Applebee's and higher IHOP sales. The Rental and Financing segments' combined profits are expected to be approximately $40 million. G&A is expected to range between $142 million and $144 million. Cash from operations is expected to range between $102 million and $116 million. The increase is a result of higher profits. Free cash flow is expected to range between $93 million and $108 million. Capital expenditures are expected to be approximately $7 million. And lastly, we provided full year adjusted earnings per diluted share expectations of between $4.14 and $4.24 a share. Now regarding the refinancing of our debt, this remains very important to us and we continue to evaluate our options very thoroughly. But we believe that now is not the right time to refinance. Our consolidated leverage ratio at the end of the third quarter was 4.7x, marginally lower than the 4.8x at the end of the last quarter, and we expect it to be near 4.9x at year end. The leverage ratio remains within our comfort range, given our business model and our ability to generate stable free cash flow. So in closing, we generated a strong quarter and created value for our stockholders. And with that, I will turn the call back over to Julia. Thank you.

Thanks, Tom. In summary, both brands continue to outpace their respective categories. We generated substantial free cash flow and repurchased over $10 million of our common stock this quarter. We remain committed to our capital allocation strategy, returning approximately $68 million combined to our stockholders through cash dividends and share repurchases this year. And we continue to be maniacally focused on managing G&A. Our goals remain to strengthen our core domestic business. We are committed to driving sustainable and positive same-restaurant sales and traffic, generating strong free cash flow and collaborating with our franchisees. Now Tom and I would be pleased to answer your questions. Operator?

[Operator Instructions] And your first question is from the line of Will Slabaugh of Stephens Inc.

Wanted to ask about IHOP first and that mix that you saw higher this quarter. Do you see that as more of a result of simply the menu layout? Or is there also maybe a more suggestive selling there? Or do you think the media works really well to drive that mix higher?

So we didn't do anything from a suggestive sell program, in particular. As I said on the prepared remarks, I really do believe that the menu, if you were to see the difference between now and prior, with a really well designed menu that we had tested extensively with our franchisees and it provided the large majority of the average check increase because of product mix, there was a little bit of pricing in there. But largely, it was just an incredible design, architecturally, of the menu, which allowed people to easily navigate it. I think we ran out of a couple of items in the first week and they've even on the menu for 15 years, but people just didn't know they were there. So there was a tremendous sort of new delight to our guests. And frankly, because of the way we navigated and architecturally designed that menu, it also made it easier for speed of service and for back of the house. So that was a particular strength. And then, frankly, we highlighted appetizers, which we had never done, as an example. And I think we ran out of a couple of appetizers, as I said, the first week. So all in all, a really good testament to our strategy and consumers loved it.

Got you. And one more quick one, if I could. I was just wondering if you could speak to the day part strength at both concepts. I know you've been focusing a little bit more on the core breakfast here at IHOP. Just curious how that fared, as well as lunch and dinner. And if you would, on speaking to Applebee's as well.

So because I've been here so long, I can speak from years gone past. But in terms of breakfast, lunch, dinner and late-night at IHOP, in the old days, it was all breakfast and there wasn't much lunch, dinner and late-night business. Today, they're pretty well spread in terms of sales, and we saw a good definition and increase at each of the day part on the IHOP side. On the Applebee's side, we saw strength. I think our opportunity, pretty much like everybody at casual dining, still continues to be a slight decrease at dinner. But we're working on every day part. And I guess the great news is, because we've done so much work, we know what our guests want at each of the day parts and they want different things at both brands. So that's the real focus for us for today and going forward.

Our next question is from the line of Michael Kelter of Goldman Sachs.

I guess, first, I just wanted to check in on IHOP, which was pretty impressive, what you guys have been able to do. I guess what I'm curious about is the guidance you raised, the 2% to 3% same-store sales for the year. To get to the midpoint of that, the fourth quarter would need to come in at 5%, which is a further acceleration. Is there something you're seeing that drove you to choose that as a base case?

We've been very successful this year at IHOP, and we feel very good about the guidance.

Well, that sounds good. Also, on IHOP, you talked an evolving media strategy. I just wanted to get you to maybe elaborate on that, and I ask because it does appear that your share of voice and traditional media hasn't moderated of late. Is it that you're moving your media elsewhere and it's becoming more effective for you? Is that kind of the crux of it?

I'm being very thoughtful about the answer because it's so competitive. I think it's a great question, Michael. I think the way to think about our media and advertising strategy at IHOP is, we have made incredible inroads in a very short period of time in the social media space. Sort of, frankly, not like anything I've ever seen in my career. So that, in and of itself, with very little effort, is sort of interesting, right? And the stat we always talk about is, if the average guest looks at a TV spot for 15 to 30 seconds, they're on our website for an average of 3.5 minutes. So it's pretty amazing what's happening in social media. So that's number one. Number two, I would tell you that we have in no way meaningfully done anything against our television strategy. We've made it more effective with some of the ways we're buying, but it's still a very, very strategic television buy that we've been able to do. I guess the best way to describe it to you is we've gotten very creative with how we buy, when we buy and how we make that sort of dichotomy between all of the different mediums' work and it's been incredibly successful for us. I guess that's the best way of saying it.

And then one last one, on a different topic. You said you took down your guidance for Applebee's openings for the year and talked about the shift towards remodels as far as capital spending by franchisees and then some delays from the franchisee-to-franchisee transactions. I guess my question is, should we assume, as a base case, since both of those dynamics are temporary in nature, that Applebee's unit growth will reaccelerate in the future?

I think that's a fair assumption. And again, the one thing I would add, Michael, when we made the acquisition, we were very clear at the time that for the first couple of years, we actually didn't anticipate any development because we wanted the franchisees to focus on the remodel. It probably took a little longer for us to build up that pipeline than we anticipated, but I think your assumptions are fair going forward.

Our next question is from the line of Jeff Farmer of Wells Fargo.

A little bit more of a difficult question to ask as well. Just sort of looking at the business model out over the next couple of years. So as we get into 2014, obviously, the refranchising initiative is largely behind you. It's basically a year behind you. I'm just curious if there are any other major structural shifts on the horizon. And I'm asking in the sense that your revenue mix had been moving pretty dramatically, that's more stable now. Your margins are more stable. Looks like your revenue growth is going to be far more consistent. Cash flow is more stable. I know that that's ultimately what you're working toward. But it really did look like, as we got to the end of '13 and then into '14, that you've largely accomplished that. So moving forward, any other big structural shifts on the P&L or the cap structure that might catch us off guard?

I don't think catch off guard. I think the investment community is well aware of the fact that refinancing our debt has a very large impact on our cash flow. So that's something that we are, as we think about the future, we're very focused on. I don't know, Tom, if you want to accentuate on the refi, but it's a substantial change...

No. I mean, assuming it goes the way we expect it, it should be a significant help to us.

So I think that's number one and everyone is aware of it. I think secondarily, and I've said this for a while, there are 3 growth patterns, right? So if you think about growing 80 to 100 units a year, that's not insignificant. So between our organic growth, our development, our international growth and our nontraditional venues that we're exploring, we feel very good about the opportunistic look-see in the future of development, all in.

Okay. And then you touched on this a little bit, it's come up in a couple of questions. But just because you guys do have a pretty broad demographic from a consumer standpoint across both concepts, you do have probably a better lens into sort of the consumer behavior that's out there. Anything that caught you off guard sort of going from June into sort of the weaker July period, through the summer and even into October, when you have a handful of restaurant companies telling you that it looks like life's a little bit better? How have your consumers been behaving? Any surprises there or anything worth sharing with us?

So I'll use my quotable quote, which is, I think the environment is lumpy and bumpy and I think it will continue to be lumpy and bumpy. So I don't think we were particularly surprised at any time this year. We said at the beginning of the year, it's going to be lumpy and bumpy. We focus almost exclusively on what we can do to differentiate both brands, both innovatively, creatively and working with our franchisees. So that has been our maniacal focus. I think it also tells you, with the success of the menu, what a focus on the menu, which we have continued to do at both brands, can do in terms of appealing to what the consumer wants. So trying to stay one step ahead of where the consumer wants you to go has really been in our favor. So I would say that's our focus and, frankly, not surprising, I think our environment continues to be lumpy and bumpy.

Our next question is from the line of Chris O'Cull of KeyBanc.

My questions relate to IHOP. Julia, does research at IHOP show more guests have an intent to return following menu changes and all the changes to service?

Yes, absolutely.

Okay. When do you think we should expect traffic to start showing improvement at IHOP?

Well, we're -- as you know, we've -- it's been a long, hard road over the last, gosh, 3, 4 years. So we are making that progress each and every quarter. And if I have that magic wand, I'd wave it. But we would love for traffic to turn just as soon as humanly possible. We're doing all the right things. It does take time. Leading and lagging indicators would argue that we're in the right direction. And remember, Chris, in second quarter of this year, we did see a slight positive in traffic. So we know we can get there and we feel confident we can get there again.

Given the guidance you provided and the implied comp range for the fourth quarter, are you expecting the check to accelerate from the level it was in the third? Or are you expecting some traffic improvement in the fourth?

We didn't guide on that. I think the way you should look at the guidance for the full year, as I said earlier, we feel good about where we are and that's why we guided the way we guided. We didn't actually guide on the individual pieces and parts.

Okay. Fair enough. And then Tom, the IHOP franchise income wasn't as high as we would have expected, given the strong comp performance. Was that the pancake license revenue being down with transactions?

We're taking a look at it. We didn't -- I don't recall there being any glitch in the pancake batter. You know what, we're going to do some -- I want to make...

We're going to do some reconnaissance for that.

Yes, we'll do some reconnaissance. When we get to the end of the call, by then we should be able to answer your question. We'll come back to you, Chris, if that's okay.

Yes, that's fine. And just one last one. Given IHOP -- an IHOP remodel program may kick off here soon, do you expect it to have any impact on franchisee development?

That's a good question. There are, gosh, 355 IHOP franchisees and there's a small group developing. So I don't see that as a meaningful issue. And again, the pipeline at IHOP has been robust and literally predictable since 2003. Every year, we've had 40 to 60 restaurants develop. So I don't see the remodel -- we've done 2 remodels during that time frame, so I don't really see the remodel program as in any way making an impact on the development. Applebee's is somewhat unique, given that it had been so long and they really desperately needed that remodel. So we deferred focus and we were fine with that. So I have every confidence we'll get them back on track with it. And I even see the pipeline today, it's a good pipeline. So it's a fair question. But there's nothing that would suggest to me that it's going to be any different than it's always been at IHOP.

Our next question is from the line of Michael Gallo of CL King. Michael W. Gallo - CL King & Associates, Inc., Research Division: Just a question on Applebee's in terms of the remodels. What percentage is now on the new image? And are you still getting the same sales lift that you've been getting kind of pre/post net of control?

So the answer to the latter is yes. We're getting about the same increase -- the franchisees, rather are getting the same increase pre/post net of control. It's a single-digit number and the system is about 66% done and will be finished pretty much by the latter part of 2014. Michael W. Gallo - CL King & Associates, Inc., Research Division: Okay, great. Second question, obviously, good to see IHOP going into some of the nontraditional venues. I was wondering if you can update us at all in terms of how big you think that market can be and then also what kind of volumes we should expect on nontraditional stores versus regular stores?

So hard to tell. We're just getting into that business from a nontraditional perspective. So really, too soon to tell on average volume. As you might well imagine, the airport has got 75,000 employees in it, right? And we're open 24/7 there. We're not -- we're in front of security, not behind. So all indications are that's a very high volume restaurant. So I don't know if I want to go there for projectability. It's a pretty unique -- it's the largest airport in the world, so it's very unique. We started at the top, but we're working our way down. So that's kind of the unique set of circumstances. We'll know more in the next couple of years as we expand the nontraditional capability. Very much focused right now on airports and colleges, but we'll have a better sense of it over time.

Our next question is from the line of John Ivankoe of JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Julia, you mentioned in your prepared remarks a lot of things, but things around enhancing service at Applebee's, your technology, I think you kind of threw in value and some of which may have to do with your lunch business specifically. So how much of the change could it be? I mean, is it different than kind of like the pick two types of lunch where you really focus on many more products that are available at price points and you can kind of use speed to better compete against fast casual as it exists today? I mean how big of an opportunity is it, and how big of a change do you think the brand might see?

Yes. It's a fair question and a good one. We're in a work in progress. We're doing a tremendous amount of testing on the fast casual lunch. We're doing a lot of work rapidly on engineering the menu itself to do -- again, I'm trying to create value for the guests, but I'm also trying to make certain our franchisees make a great profit. So it's trying to do both at the same time. So we're doing a lot of rapid work and a lot of testing, more than we've probably done in a really long time. So my hope is the outcome is really successful, but at this point, we're a lot of test in progress. I think you need to continue to ask me that question at the end of every quarter. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Okay. And given what's going to be a fairly benign commodity environment for 2014, I mean, any sense on franchisee pricing kind of being above, below average of where we trended in the past?

I can go back and answer that question more thoroughly, but my gut and my recollection is that franchisees have been taking 1%, 2% pricing for quite a long period of time. Although Applebee's, this has -- I think both brands have tried really hard, the franchise community, to minimize that price increase in this environment. I don't see anything dramatically changing one way or another. There's a high sensitivity, as you might well imagine, to pricing and we work hard through engineering to minimize that, just given the environment that we're in. But again, I always remind people, there's a fair amount of people that do the 2 for $20 and then there's a whole bunch of people who don't order off the 2 for $20. So it's been interesting. The one thing I will say, we never talk about this and we never take credit for it, but the purchasing co-op that we put into play, gosh, almost 5 years ago, is having such a positive impact on the franchisees' middle of the P&L. That's also led to just not having to take a lot of price. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Okay. And just one final question, if I may, different direction. We've gotten pretty accustomed to some very, very low CapEx unit in the corporation. I mean, do you see anything over the next couple of years that would significantly change that on the corporate side, systems, headquarters, that type of thing?

I wouldn't expect to see it radically increase. I don't necessarily know it will stay down at this level right now because there could be some stuff that we want to do, to do some development in some areas in terms of like trying out new things in the company restaurants and that kind of thing. It's testing, but not anything radically different. No, I wouldn't.

Yes. I was going to agree with Tom. I was going to say that IT, we've got that down to a pretty good science. Tom's done a wonderful job and deserves the credit, but -- he and the team. I would say though, when you're thinking about innovation and creativity and the rapid innovation and testing we're doing, from time to time, we may need to put some capital into some of these R&D restaurants to test. So I wouldn't want to preclude, but I don't see it skyrocketing in any way, shape or form. We've been pretty good at staying in that $7 million to $10 million range.

We have one more question and that is from the line of Bryan Hunt of Wells Fargo Securities.

I was wondering if you could talk about the relative intensity of promotions that are occurring in casual, as well as family dining. That's my first question.

I would say the level of promotional activity in both categories and fast food, it's pretty aggressive right now. I think everybody's trying to get the valued customer. There's a fair amount of promotional activity going on, both nationally, regionally and locally.

All right. And then my second question, I was wondering if you could update your thoughts on the Affordable Care Act, both on its impact on the consumer, as well as your operators. I mean, what do you see today and maybe what's changed versus a couple of quarters ago?

Well, the quasi-reprieve with the United States government has given people a chance to take a deep breath and say, "It's not like tomorrow this is all going into play for the franchise community." I think most franchisees have said, "Look, let's not overreact. It's a work in progress. Everything has not been spelled out yet." I think people have taken a very -- franchisees have taken a very appropriate long-term view, not panicking, not raising prices. Certainly, our purchasing costs, which I mentioned earlier, has been very good to the franchisees. But I'm not hearing -- a year ago, there was tremendous concern and uncertainty. I think today is kind of a wait-and-see mentality and being very cautious, very thoughtful, very focused on differentiating the brand and not doing short-term things for the long-term detriment. There's a very sort of a calm influence right now. And I think we've done a tremendous amount of work here, trying to put on Webinex and webinars and really help the franchisees understand the law, what we don't understand, what we do, the timing and sequencing, the reprieve. So there's been a lot of good work done. I'm not hearing -- I mean, certainly, there's angst, but I'm not hearing a ridiculous hockey stick kind of, oh my gosh, let's overreact to it. That's not what I'm hearing today.

Okay. And then my last question is, when you look at your footprint in both concepts, we've heard that there's pockets of pretty strong outperformance in various parts of the country. Are there any disparate performances between relative geographies in both Applebee's and IHOP? And that is the extent of my questions.

I would say it's been pretty consistent. There's no question that in the state of California, most recently, we've seen tremendous growth on the IHOP side. But I would say pretty much great gains all around. On the Applebee's side, I would say the mid-Atlantic area is probably -- I'd say at Applebee's, it's been the mid-Atlantic area, and at IHOP, it's been California that have done stellar, but I'd say everyone is doing well. I don't think that there's anything -- I'm looking at the chart as I speak to you and I'm not seeing anything that stands out, other than maybe those 2 areas in sort of the -- gets a little extra zing right now. Does that answer your question?

Yes, wonderful.

And then following up on Chris' question, if the question is the year-over-year franchise revenue for IHOP, waffle and dry mix is down a little bit in terms of the margins, and bad debt was up a little bit versus last year.

But he was asking for the franchise segment profit, what was the difference? That was it.

That was the reason for it, why it was -- it was up. It's up, but is not up as much as the sales increase would indicate.

Okay. Hopefully, Chris, you're on the line and that answers your question. If it doesn't, feel free to come back on.

Okay. So ladies and gentlemen, thank you for your questions. I would now like to turn the conference back to Julia Stewart for closing remarks. Thank you.

Thanks, operator. And thank you, again, for participating this morning. Our fourth quarter and full year 2013 reporting date is scheduled for February 26, 2014. If you have any questions in the interim, please contact Ken, Tom or myself, and have a wonderful holiday. Take care.

Thank you very much. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Have a good day. Thank you.