Welcome to the First Quarter 2015 DineEquity, Inc., Earnings Conference Call. My name is Vivian, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Ken Diptee. You may begin, sir.

Thank you. Good morning, and welcome to DineEquity's first quarter 2015 conference call. 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. During the call, 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. 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-K filing. The forward-looking statements are made as of today and we assume no obligation to update or supplement these statements. We may also 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 now turn the call over to Julia Stewart.

Thanks, Ken, and good morning, everyone and welcome. We're off to a great start this year delivering strong first quarter results and building on our momentum. Adjusted earnings per diluted share grew by 30% to $1.64, compared to the first quarter of 2014. We generated robust free cash flow of approximately $41 million, of which 77% was returned to shareholders. This includes roughly $17 million in cash dividends paid on January 9 and $15 million in share repurchases. Both Applebee's and IHOP achieved positive same restaurant sales for the first quarter. Additionally both brands continued to lead their respective categories based on industry sales data. Applebee's first quarter comp sales rose 2.9%, recording its fourth consecutive quarter of positive sales, as the execution of our brand positioning continues to unfold. At IHOP sales rose 4.8%, marking the eighth consecutive quarter of positive sales and the third straight quarter of positive traffic. We are working hard to sustain this momentum and we are committed to the long term vitality of two iconic brands and creating even more shareholder value. This commitment was summarized during our previous earnings call when we outlined our four DineEquity strategic priorities to drive the business forward. First, to innovate and drive higher growth from our category leading brands. We are continually testing to broaden their respective pipelines of menu items driving better in restaurant engagement and operations and acting on the results of the segmentation study, we completed last year to drive sustainable positive sales and traffic. Second to drive an increase franchisee restaurant development, we are investing in improved site selection tools and process and are doubling efforts to identify new developing franchisees and sustain and grow our robust pipeline. We are actively working on growing non-traditional development, particularly at IHOP and have several deals…

Thanks, Julia. I will give some brief color on our financial results. Starting with income, adjusted EPS for the first quarter rose by 30% to a $1.64 from the $1.26 in the same period of 2014. And GAAP net income available to common stockholders increased by 37% to $28 million. Lower interest expense and higher gross profit from higher sales were the primary drivers of the increase. You will know note a decline in revenue is from financing operations. This occurred because last year, we recognized $1.4 million in termination fees that didn't recur in 2015. Let me turn briefly to G&A. G&A at $34 million in the first quarter of 2015 was essentially flat compared to last year. We stand by our full year guidance of between $149 million to $153 million. There's always some seasonality to our G&A such as annual franchise conferences and we forecast investments in talent including the new IHOP brand President as Julia just mentioned as well as filling other open positions. Remember also that there's a G&A impact from the 53rd week in 2015. Now regarding the balance sheet, cash on the balance sheet at March 31, 2015 was approximately $133 million. Now let me break that down further. Approximately $66 million of this cash is related to gift card programs and advertising funds. We'll use the remaining $67 million of fund certain cash on hand requirements for our securitization, our working capital needs, dividend payments and share repurchases. For any given quarter and, we expect that the sum of these cash components excluding gift cards and advertising will range roughly between $50 million and $75 million. Now a few comments on the cash flow statement. The decline in cash provided by operating activity was primarily due to the timing of the initial…

Thanks, Tom. To recap, we delivered a very strong 30% increase in first quarter adjusted earnings per share. We generated $41 million in free cash flow, returning approximately 77% to shareholders. Both of our brands continue to lead their respective categories based on the industry sales data. We are very well positioned for success and we are committed to our long-term plan to drive shareholder value which includes exploring the potential of investing in a growth vehicle beyond our two current brands, we'll update you if and when appropriate. And now, Tom and I would be pleased to answer your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Brian Vaccaro from Raymond James. Please go ahead.

Good morning. Just had a quick question. Julia, I know you've been doing a lot of guest segmentation studies and drilling down on that front. And I guess the question would be with the success that you're having on social, et cetera, how have you seen the -- at both brands, both IHOP and Applebee's, how have you seen kind of your guest mix evolve? And has there been a significant change in one certain area in the last quarter or two?

I wouldn't say a significant change, but I would tell you we had a very robust sort of millennial group, if you will, before we ever started this work. So we were doing well before we even started the segmentation study work. I do believe and I've seen that the additional work that we're doing in the social and digital space has made that number go up, but we had a very robust number to begin with.

Sure. Okay. And then just one quick one if I could. On the dividend, can you just talk about how you think about your comfort range on the dividend whether it be as a percentage of your overall free cash flow etcetera. Tom?

Well, we look at it ongoing issue as you know we just raised it in October and we want to make sure that whatever we do with the dividend is sustainable and it mates well with where we are with share repurchases so it's something we look at continually, but we don't have a formula that we apply to it.

Okay. Thank you.

And our next question comes from Chris O'Cull from KeyBanc. Please go ahead.

Thanks. Good morning, guys.

Good morning.

Just as a follow-up to the dividend question. Tom can you talk a little bit about the timing of dividend changes because I know you guys made a change after the refi last year in October, but is the plan to review it a year from -- in this October this fall or...

We will review it ongoing, but we don't have any set timetable when the dividend might change.

Okay. And then Julia you laid out ways to drive more unit development including better site selection, support for franchisees, international, non-trade. Can you help us understand where each of these efforts are in terms of having an impact on unit development and then may be which will likely have a greater impact in terms of development over the next couple of years.

Yes -- that's actually, Chris -- that's a very good question. But -- the work I talked about is related to the site model work, that's in the domestic USU.S. And. I can believe that can have an impact in 2016 and beyond. It takes a while as you know, to set the sites up the trader trade areas and then to get the pipeline going. I am very, very comfortable and feel very good about the guidance we gave for 2015. But I think we can make that even more robust for the domestic U.S. in 2016. The non-traditional work is really focused on universities and airports and travel plazas, and that's just strategy work that we're doing where you're really focused on those clients and go after it in a major way. I'll talk more about that as the year progresses, just some exciting one-offs. It's not ever going to be 50% of EBITDA, but it certainly is a growth vehicle and opportunity for us to get our brand in unique venues where we really haven't been able to touch that customer before; so excited about that. And then lastly on the international side, that work is really in progress and that is partly due to the efforts that international has made in finding the right partner. So I would call that baseline work. That they've spent really the last I'd say 12, months, 15 months working on. So once you get the right partner that work can go pretty quickly. So again, I would say the out years it looks very good for international. It does take a while to set up, but the international side of the business doesn't use the same business model work that we're using in the U.S. you're using just frankly different modeling systems. But I think more importantly international is finding the right partners. And that work has begun in earnest.

And then lastly, I know several Applebee's franchisees have agreements up for renewal, are you finding that when store agreements come up for renewals and that folks are considering relocating restaurants or are they closing restaurants or are they -- how are they viewing the renewal period?

I would say, obviously we're involved in those every month. I would say today it's a small handful of renewals. The kind of robust renewal process you're talking about really happens closer to 2019 and 2020, 2021 when both brands 20 years ago had significant development. So we've got plenty of time to talk about that. But right now I would say the large majority of renewals are renewed. And they stay in the current location that they're in. And part of that has a lot to do -- this isn't fast food right. You're talking about land building FF&E of a significant investment. So for somebody to move that trade area, it has to be pretty significant, right. You see a lot more of that in the fast food business. In family dining and casual dining, you're talking a 5,000 square foot building with a 100 parts. It's a much more involved process. So I would say in general terms the large majority of the renewals are just rate renewals.

Okay. Great. Thanks.

And our next question comes from Alton Stump from Longbow Research. Please go ahead.

Thank you. Good morning.

Good morning.

Just a quick question, which I think I ask every quarter now. Which is on a tablet roll out how that's going, what you're seeing, what is going well. Maybe what could be improved as you complete that roll out later this year.

Well, I'd say this that we're actively working on it. We have a robust team of people working on it. I mean, like any new technology there's always ups and downs with it. But we're being very thoughtful and deliberate about the roll out. And the project is ongoing and we continue to keep you apprised call after call.

Okay. Thanks. And then just one quick follow-up. As you look at store growth target for IHOP obviously comps over the last 18 months have improved nicely. Are you seeing more demand from franchisees wanting to build in the U.S?

Are you talking about IHOP or Applebee?

Yes. Yes, IHOP.

Okay. At IHOP, we've had a very – and I really can say this because I have been here so long. We've had ever since we announced that we were getting out of the old business model on January 1, 2003 until today. We've had a very steady consistent interest in development at IHOP with a pretty robust set of franchisees, who either walked want to do what we refer to as MSDA -- Multiple Store Development agreements or SSDA, Single Store Development agreements, but that has been very consistent and very robust since frankly the day we announced the getting out of the old model. So it's been very consistent. You will see and we have slightly an increase in franchisees that are IHOP franchisees wanting to become Applebee's franchisees. And Applebee's franchisees wanting to become IHOP, but that's a small handful. But I would say steady, very steady interest and development territories.

Okay. Great. Thank you.

And our next question comes from John Ivankoe from JPMorgan. Please go ahead.

Hi. Good morning. Thanks. It's Amod Gautam today. I wanted to touch on a couple of industry themes. The first was it seems like the first quarter there was -- there has been a pretty sizeable increase in terms of average check driving the comp. So as it little late relates to that – I mean is that something you've seen as well for both the brands and may be perhaps if you can you know talk about the price mix traffic for each of the brands?

So two things – great question. One we always talk about the fact that our research and our really iconic brands suggest that they continue to take and can take pricing to cover inflation, we've been saying that gosh, for multiple years. That really hasn't changed product growth and our iconic brands have the ability to take pricing. We don't control that at our franchisees do. But I think they're also very thoughtful about the art and science of pricing. In this first quarter 2015, half of these Applebee's comp was driven largely by check and mix and comps IHOP's comp was a healthy mix of traffic and check.

Okay, great. And then secondly, the industry from other restaurant companies, there is a lot of commentary about the labor market tightening and wage inflation and you obviously have a very broadly distributed unit base cost across the country, so first of all, what are franchisees telling you on that front? And secondly to the extent that there is inflation, are you working with them in any way in terms of labor tools and operations specifics in terms of being able to help offset some of that inflation?

Our franchisees are probably the happiest they've been since I can remember about food cost inflation as they are because there's virtually none of it because of our purchasing co-op. So between the two brands and $our $2 billion spend and our very successful purchasing co-op, we have almost the de minimis increases this year, so they are very happy about that. Certainly they look at all the other aspects of the business and labor has been an area they have talked to us about, but as you can see from the results their first quarter, they have limited their pricing because I think they recognize the real value in our brands, is keeping that price value, so they've been able to handle that. We continue to work with them at all aspects of the business, whether it's ACA or any of the minimum wage increases and I think they've figured out the art and science of pricing and they have been very good about being very focused about what that looks like and not needing to take massive amounts but part of that is because they virtually have no food cost inflation.

Okay. Great. Thank you.

And our next question comes from Michael Gallo from CL King. Please go ahead.

Hi. Good morning. I wanted to just drill...

Good morning.

Good morning. I wanted to just drill in a little bit on some of the brand work that you've done at Applebee's. And I was wondering as you start to think about the box, the back of the house, the kitchen equipment package, etcetera, what kind of changes you think you might need to make in order to really bring that to life. Or do you feel like you have...

So, on the -- I'm sorry, go ahead.

Oh, no. Where you want it to be, thanks.

Yes. So on the Applebee's side; and I think I'd mentioned this earlier, there is a lot of work on the pipeline and the food and the menu. And for the most part we feel very good about the back of the house. I think I'd mentioned in my prepared remarks, we are testing what you would think of as some small equipment changes that have the ability to bring different flavor profiles to light. We don't need a major piece of equipment.

Yes, it's not radical.

No, no. to execute against our menu strategy. But there maybe a couple of small pieces of equipment and they are in test right now that would bring flavor enhancements to bear. And items that would you think about of aas signature in differentiating Applebee's, but no major needs.

Okay. Great. And then I know for the last couple of quarters you've talked about testing the loyalty program. Is it still too early to provide any update there? Is that still a work in progress?

So the loyalty program is interesting. We -- this is one of those -- we're not necessarily in first place, but we have looked broadly at some of our direct and indirect competitors and some of either the mistakes they've made or if they had to start all over what they would do differently. And we are doing a lot of best demonstrated practice work and sort of vetting what the competitive set both in the industry and outside the industry has done and we are sort of hitting a new look see, if you will at what we can do differently to differentiate the brand, but really learning from some of our both direct and indirect competitors in the industry, and frankly outside of the industry in terms of lessons learned. So more to come but I think we are learning from -- others mistake.

Yes. We're also learning in processing the results of some testing we've done ourselves.

Okay. Great. Thanks very much.

And our next question comes from Imran Ali from Wells Fargo. Please go ahead.

Hi. Good morning. Thanks for taking my questions. You touched on this earlier a little bit in terms of investing your initiatives, but your G&A guidance this year is up from 2014 and I think would be the second year of G&A dollar increases that we are seeing, I think, multiple years of decline since 2007. What specifically is driving this G&A dollar growth and what is -- in your view what's the latest cost savings opportunity for your company overall?

So let me talk about the overall G&A piece and then I will let Tom answer some of the specifics. So -- and this is sort of a retro answer to start with. When we made the acquisition of Applebee s in late 2007, we said that in steady state, we would save at least 50 million in G&A and the reason we would get there is from the sale of all the company operated Applebee's so that s a lot of the front store leadership that would go away. And then we would also integrate shared services. And in 2012 we also did a bit of when you add all that together we saved more than the $50 million steady state, and once we hit steady state which was -- approximately the end of 2012 we talked about going forward that we would have sort of small increases in G&A as necessary so that was sort of our overarching strategy. Tom maybe you could speak you comment into company specifics.

Yes, I talked to a fair bit of this -- earlier but you know there the 53rd week there is hiring, of the IHOP brand president there is some work that we are doing in IT and there's just general inflation. but the 53rd week is 1.5 million more or less. The point being -- though that we know the D&A is a fundamental level for us control and if you go through our P&L and look at the things that we directly control we have the most direct control over G&A and we talk about all the time.

Got it. Understood. And you previously talked about the potential for acquisitions, do you have any updates to share at this time on the M&A front?

No there is nothing M&A I continue to say that we continue to look and the way you should visibly think about it is -- you've got Applebee s and IHOP on the right quadrant if you will full service 5000 square feet building very much respectively number one in their categories think about us going to the exact opposite quadrant and I think about us as looking in the fast casual arena or something smaller footprint and as I've always said something smaller, a concept not a brand.

Right

So we're continuing to look trust me there is a lot of fast casual restaurants out there. It's trying to find the right thing for us and certainly our franchise will franchisees would be developing it, not us so we got to make sure it light bar for the right box with the right ingredients that meets our franchisee's needs but factor has been they in fact would be spending their capital to build it. So we're very prudent and thoughtful about it, but nothing eminent. I'll certainly keep everyone posted.

Great. Thanks very much.

Thank you. We have no further questions at this time. I will now turn the call over to Julia Stewart for closing remarks.

Well, thank you again for joining us. The recording date for the first quarter's results -- excuse me, for the second quarter's results is scheduled for July 29. If you have any questions in the interim, as always, feel free to call myself or Ken or Tom. Thank you, make it a great day.