Welcome to the Second Quarter 2016 DineEquity Inc. Earnings Conference Call. My name is Sophie and I will 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 Ken Diptee. Ken, you may begin.

Good morning and welcome to DineEquity's second quarter of 2016 conference call. I'm joined by Julia Stewart, Chairman & CEO, Tom Emrey, CFO, and Gregg Kalvin, Corporate Controller. Before I turn the call over to Julia and Tom, please remember 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 evaluate such forward-looking information in the context of these factors which are detailed in today's press release and 10-Q filing. The forward-looking statements are as of today, 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 Web site. I will now turn the call over to Julia.

Thanks, Ken and good morning everyone. Thank you for being on the call today. Here are the headlines for the second quarter. We delivered year-over-year growth in second quarter adjusted EPS despite soft, comparable sales at Applebee’s and IHOP. We also generated free cash flow of $56 million in the first half of the year. IHOP second quarter comp sales increase by 0.2% while ramping over the brand highest quarterly sales increase in over a decade. At Applebee’s we saw a decline of 4.2% in comp sales for the quarter and I’ll elaborate on this shortly. As a result of the sales performance in Applebee’s and IHOP during the first half of the year and our outlook for the back half we are revising our 2016 comp sales guidance downward for each brand. We will expect comp sales improvements in the second quarter, but given the year-to-date results we think it’s prudent to reset the ranges. Tom will elaborate on these revisions in his remarks. Applebee’s has been number one in casual dining for 9 consecutive quarters as measured by total system sales. Our brand remains strong and we continue to drive brand differentiation for the long-term, while testing and implementing short-term traffic driving initiatives. In May, we announced a nationwide launch of certified USDA Choice hand-cut steaks on a wood fired grill using real American oak. Over 40% of our menu items are now being cooked on the wood fire grill from steaks and chicken, salmon, pork shops and vegetable, all now have that smoky flavor they love. We are well aware of changing consumer needs and demands, so we’re testing several revitalization initiatives to address them. To give you a sense they include items such as value messaging, revitalizing the bar, Carside To Go and delivery options, the…

Thanks Julia and good morning everyone. I’ll provide a brief recap on the second quarter’s financial results starting with the income statement. Adjusted EPS in the second quarter was $1.59 compared to $1.53 in the same quarter of 2015. The increase was mainly due to fewer weighted average shares outstanding, lower income taxes, higher gross profit and a decline in cash interest. These items were partially offset by higher G&A. Regarding gross profit for the second quarter, the slight year-over-year increase was mainly driven by development by IHOP franchisees over the last 12 months and favorability in IHOP royalties in dry mix. These were partially offset by lower Applebee’s royalties and a decline in financing interest income. Turning to G&A, on an adjusted basis, to exclude non-recurring consolidation charges, second quarter G&A was approximately $36 million compared to roughly 35 million in the same quarter of last year. The increase was primarily due to higher personnel related costs. When including roughly $500,000 of consolidation cost, G&A was $36.5 million. Please note that G&A for the second quarter also reflects lower incentive compensation accrual due to the comp sales performance of both brands in the first half of the year. And as a reminder, there is some seasonality to our G&A in the back half of the year related our annual franchise conferences which are both scheduled to the third quarter this year compared to the fourth quarter in 2015. For the full year we reaffirm our G&A guidance range between $154 million and $158 million and please note that this includes a total of approximately $4 million of non-recurring costs related to our restaurant support center consolidation and I'd like to highlight that these costs do not have an impact on adjusted EPS. We continue to closely manage our G&A.…

Thanks Tom. To recap, we delivered growth at adjusted EPS despite comp sales being below our expectation. We also continue to generate strong free cash flow a significant part of our story is that we have two iconic brands. IHOP is the leader in the industry’s only growing daypart and we’re in the early stages of revitalizing Applebee’s, one of the world’s largest casual dining chains. Getting both brands firmly back on track is our top priority. We’re taking steps to drive positive and sustainable sales and traffic with the renewed focus on value at each brand. We also continue on thoughtfully exploring a strategic acquisition. Finally, the consolidation of our headquarters is nearly complete and we’re seeing the benefit of dual synergies across the organization which has facilitated more effective collaboration. The consolidation resulted in approximately 100 new hires and has brought our two strong brands under one roof. In closing, we’re confident in our plans and the strategic steps we’re taking to drive the business forward. 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 the first quarter comes from David Carlson with KeyBanc.

Hi, I just had a really quick question. Is the thought process being that -- on the free cash flow that after paying dividends you still plan to spend the excess to repurchase shares? And then a follow-up to that being given the same restaurant sales decline and the revised guidance, has it at all caused you to revisit your capital plan?

No.

No, it hasn’t made any real significant adjustments to our free cash flow when you look at it in totality and so we’ve been doing what we’ve been doing for the last while and we’re not probably going to be making any changes to that.

Our next question comes from Brian Vaccaro with Raymond James.

Good morning, and thanks for taking my questions. Julia, I wanted to just start out with the wood fired grill platform at Applebee's. And appreciate some of the details around the initial guest response. But can you remind us sort of what has been done so far to build awareness around the platform? And what the plan over the next several quarters would be to continue to drive awareness there?

Sure. So in the middle of second quarter, we began the advertising that talked about the fact that we had this wood fired platform and also that we were hand cutting our new USDA Choice certified steak, so on the American oak which is, that was the major thrust. So for the balance of the year, you’ll see more of that about, both the value messaging but it also relates to other products that go on the wood fired platform. So the only thing we talked about in the initial launch was about steaks but over 40% of the menu at this point is effected by the wood fired platform. So the balance of the year, you’ll see that. So for instance right now we're in the middle of salads which has many of them are on the protein that's on the salad is on the wood fired platform and also making dressing in house. So it continues those quality cues but a lot of it related to wood fired, we think the reason I mentioned the testing is, we think there's an opportunity to bring in a stronger value message. So that was the marketing if you will and then there was PR and there was additional in store re-messaging that we did as well with the launch.

Okay, all right. That is helpful. And secondly, I wanted to ask about your perspective sort of on the broader industry weakness and maybe from two angles. First, sort of the ongoing debate regarding the health of independents and their relative performance versus the chains. Could you share your perspective from what you are seeing on the ground or hearing from franchisees in that regard?

Yes, it's very interesting, I think you heard me say for some time that the consumer is lumpy and bumpy and I would continue to say that. I think in general terms there hasn't been a huge shift in market share. What you saw a couple of quarters ago in terms of independents versus chains is very similar. I mean we are so big to make a change in that category mix shift would take a lot, so in general you're seeing very much the same in terms of market share and so forth that we saw, I would say even three quarters ago, so it's not huge changes in shifts, I think if you're going to see that it would reflect probably over several quarters.

All right. And then you mentioned your mix of millennials in terms of the consumer mix is up significantly over the past four years. Could you share where that percentage stands these days?

Sure, millennials are now over 40% of the mix at Applebee's, that's significantly higher than many of our close in chain competitors I don't have the way to get at the independents but that is a work that we've been doing both in revitalizing the brands and clearly there's no question the social and digital strategy has made a significant inroad as well. And the bar, that is one of the advantages we have at Applebee's. The bar does attract the millennial and we have programs to enhance, and I think you heard my prepared remarks about the revitalization of the bar.

Great, thank you.

And our following question comes from John Ivankoe from JPMorgan.

I wanted to go two different places. First just the overall attitude and willingness of not only the Applebee's franchise system to reinvest, but are you sensitive, Julia -- you have some experience in this industry. Are you worried about potential closures or non-renewals of the franchise system especially as growth for the brand was so robust 20 years ago?

Well, I'll start by saying that we only have 32 franchisees in the Applebee system who own almost 2,000 restaurants. So this is a very well heeled sophisticated, thoughtful group of franchises who have over the years invested millions and millions of dollars in this business. Just like our IHOP franchisees bleed blue, our Applebee's franchisees bleed Applebee. They care deeply about it, it's their primary business and they want to see it as successful as we do if not more so. So they are highly committed and as I said they've been willing to test all along with us and continue to do so, because they do believe that consumers' expectations and demands are changing. We have 40% or more of your consumer base is millennials their expectations are different than a baby boomer's if you will. I'm grossly simplifying but you get the gist. So the needs have shifted and the franchisees I think are because they are tech savvy are willing to move with us. If that means a closure here and there as it has overtime then we figure it out and we work with our franchisees. But I think you are also seeing more and more franchisees willing to realize if the shift of the trade area moves, they move without new trade area. So it’s not just about closures, it’s about moving to new areas of growth and development and they are very focused on that. So they’ve been terrific partners in that whole arena.

And you made the comment in your prepared remarks about potential growth of Applebee's in the US. I mean as you have conversations with these 32 franchisees and they have a sense of their pipeline, what may be closing, what may be moving, what might be opening. Can the system sustained at the number of units that it has today? I mean what is kind of your view over the next couple of years in terms of the U.S. Applebee's store count?

Yes, as you know we announced our, it’s probably been few years ago that we thought Applebee’s could do a couple of 100 more restaurants and that was the modeling work that we’ve done but Jim has been with us for a year and he has done even new and more sophisticated modeling and that number is still very relevant. So that work is in progress. The mounting that he does individually by DMA and with each franchisee is a very thoughtful review of where they are, and where they could grow, and what the map suggest as either trade areas develop or grow or move and that work is going to be in progress. Well really end of this year and the beginning of next year to really hone in on that sophisticated level of development and where we might be able to go. What will be interesting in that work and I really never talked about this before, much similar way to the work we’re doing in IHOP is whether there are fill in opportunities in existing markets where you use a smaller footprint or you look at different ways to outlay that marketplace. That’s the work that Jim and his team actually has been working on we’ll be finalizing and then literally sitting down with each individual franchisees. These are all of these franchisees are sophisticated developers but they want that additional mapping work which we are in the process of finalizing. So that would be an opportunity for them to really stretch thee range and look at the growth potential by DNA. Some have more potential than others.

So, can you give us color to the extent that it is appropriate about kind of the state of those 32 franchisees? Should we expect to see more consolidation? Maybe there could be some fragmentation, maybe there are some generational issues amongst what I think some of these are family-owned businesses that may be transitioning. How do you anticipate that franchise community changing? And can that be to a benefit to you in the next few years?

I think you will always -- and I have been saying this for years on both businesses, there is always buyers and sellers that’s no different this year than it’s been any other year. You’ll always see a couple of transactions from an existing franchisee to a new franchisee whether they are in the system today or not, our recruiting effort this year just like any other year has produced a handful of interested parties who would like to become our franchisees. So I think that buying and selling, if you look over the last kind of I will say 5 years in any given year you’ve had a handful of franchisees sell and handful of either new franchisees or existing franchisees thought I don’t see that as any different this year.

Okay, thank you. I may change directions for a second. It looks like your net debt to adjusted EBITDA is around 4.25 I think, is that what you guys calculate?

Yes.

More or less, maybe it is a little higher than that mid 4s.

Okay, mid-4s. What is the appropriate target leverage ratio for the Company at this point? And just remind us what kind of either refinancing opportunity. Or I guess probably better said at this point, tack on ability that you have to the current facility. That if you wanted to put more leverage, half a turn or a turn or whatever, could you and would you I guess is the question?

So let me start off with saying we said for several quarters when asked that question that we are very comfortable with where our leverage ratio is today, we feel very good about it but I'll let Tom answer in terms of the refi specific.

No, I think that's fair, we can’t refinance the securitization for a while anyway and as the year runs out this whole period of it is seven years, it runs through 2021. And so you know there's no urgency to do that, we feel pretty good about where we are and as it stands now and don't propose to make any significant changes to it. There is some room to borrow more under the securitization potentially, but we will have to evaluate that is being derived.

And then just to refresh your memory we do have the revolver which is 100 million, we have that revolver as well, and I wouldn't draw against the revolver like five.

Right about five.

Yes, it's really tied up in the letters of credit, we always have the revolver as well sorry I didn't mean to interrupt.

And then in addition to that revolver you are carrying $118 million of cash. How much of that is -- can be returned to shareholders? I mean how much of that do you want to perpetually holdback versus could be used for other purposes?

Well a fair bit of that money is advertising and gift card related and all that. So you know what we should look at is the metric that we talk about when we talk about our annual free cash flow and the amount we return to shareholders and that's you know been pretty consistent over the last couple of years that's sort of the way to kind of look at it.

Okay, thanks.

The following question comes from Michael Gallo from CL King.

Hi, good morning. One question and one follow-up, first on wood fired grill, Julia, I know you noted very strong purchase intent and customers seem to really like the product. I was wondering whether with some of the changes whether perhaps some of the core price points might be too high for where the customer is today. I know you are addressing it a little bit here on air with the $8.99 salads. But can you speak to whether some of these changes and improvements might have priced it a little above your core customer? And then also I have a follow-up question? Thanks.

Yes, so great question, really good question, I think there's two things to remember, in the casual dining space you have a lot of light user base and it we recognize and we said this repeatedly that it takes time for people to try the item, come in and actually do it. We have a huge as in all casual dining there's a huge light user base, so it does take time, so I don't want to underestimate the importance of people make it clear when they're ready to go in they'll try it and they can't wait, that type of thing, so we know that. The other thing I mentioned is it's less about the price that actually franchisees are charging for it, it was the fact that we didn't put a price point on television. So our hypothesis is some people may have thought gosh this is going to be expensive so we have a counter that with the work that we're doing for the balance of the year but I think those two things combined are an important factor to remember.

Thank you. And then just a follow-up on IHOP, it has really outperformed for a long period of time and you have done a great job with the brand. I was wondering this quarter whether you really saw anything shifting either competitively or otherwise or was it just more a function of Paradise Pancakes perhaps not being as strong a promotion as Summer Stacks was last year. Thanks.

Yes, great question and we continue to do well and the brand is as you might well imagine iconic in so many ways. I think as I said in my prepared remarks, we’ve recognized there is probably an opportunity as we think about messaging the brand and the consumers to be a little stronger in terms of reminding people what we do differently and better than everyone else. That’s the notion of the new ad agency, that’s the notion of being a lot more focused on I wouldn’t say aggressive, that’s coming not a fair word, seeing a lot more targeted in our approach about the things we do, which no one else can do and talking about them in a more meaningful way. I think I was sort of tongue in cheek to work about the fact that we’ve been serving breakfast all day for 57 years and we’ve been scratching by the cooks and we’ve been scratch cooking, we’ve been scratch cooking for ever and alike. So there is couple we are little bit of a targeted approach we can do to the messaging that we think we need to get after. The brand is certainly solid and iconic and brings that memories for anybody and everybody but I think there is an opportunity in the messaging and that’s really the focus that I was trying to get across in my prepared remarks.

Just as a follow-up to that, I mean am I hearing you right that you don't really see much changing in the dynamic around competitive or geographic or otherwise. It is just from a standpoint of IHOP controlling what it can control, is that fair?

I think that’s fair but I would also say I think I mentioned this a couple of quarters ago, there is no question, you have significantly more people in the breakfast space today than you did 5 years ago. That’s why it becomes so important how you message, what we do differently than everybody else. We just have to be more laser like in that communication.

Okay, thank you.

And a following question comes from Alton Stump from Longbow Research.

Hi, guys, it is actually Brittany Whitman on for Alton this morning.

Hi Brittany.

Hi, how is it going? On the wood fired cooking platform, I wanted to ask about the guest traffic that that’s is driving. Is it mostly just new customers or is it more regular customers coming in more often or what is that dynamic?

I think the dynamic is that you have existing guests who know and love us coming in a lot more frequently. The opportunity is to get that in frequent and light user to come in thus everything I talked about today about really focusing on the value piece of it and driving it home to that wide earned frequent user that maybe either shopping or just needs to be reminded of what we’ve got this more different.

And is there anything in the platform that maybe you could talk about to sort of keep that going or?

Well there are lots of things and I mentioned it earlier on that over 40% of the menu is now being impacted by wood fired growth. We have a real opportunity to talk about some of those other items. It’s not just about say, I challenge the development that is coming in front – in America whether salmon or the growth vegetables. I mean they are really fabulous products and thus this notion of now what we’ve got on and you’re talking about salmon. But we have a real opportunity not just to talk about the platform but and the innovations that stopped there, all the things I mentioned to you early on about all the new initiatives that really are focused on revitalization, it’s not just that wood fire platform but it’s a great beginning and there is a lot more to talk about related to that and there's value messaging. Because I always have to remind people, we play at the low end of casual dining and there's a real opportunity there to take advantage and optimize that.

Okay, great. Thanks, Julia.

We have no further questions at this time. I'd like to turn the call back over to Julia Stewart for closing remarks.

Well thank you all again for joining us on the call today, we are scheduled to report results for the third quarter on November 1st so if you have any questions in the interim as always feel free to contact Ken, or Tom or myself and thanks again.

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect.