Welcome to the Q3 2016 DineEquity Earnings Conference Call. My name is John and I will be your operator for today's call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. Please note the conference is being recorded. Now I will turn the call over to Ken Diptee.

Good morning and welcome to DineEquity's third quarter 2016 conference call. I am joined by Julia Stewart, Chairman and 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 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 and 10-Q filings. The forward-looking statements are as of today and assumes 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. I will now turn the call over to Julia.

Thanks, Ken and good morning, everyone and thank you for joining us today. I will provide a business overview and then I will turn the call over to Tom for a recap of the financial results. We continued to deliver year-over-year growth in adjusted EPS and generated strong adjusted free cash flow despite ongoing challenges. Additionally, we continue to return the majority of our adjusted free cash flow to shareholders. In fact, we once again declared an increase in our quarterly dividend raising it by 5.4% to $0.97 per common share from $0.92 effective with the next payment on January 6. We remain very confident in our two iconic brands, our brand strategy and franchise partners around the world. We have the best teams we have ever had in place at both DineEquity and the brands. We picked up the pace of innovation at both brands and we're taking the necessary steps to ensure their success. To this end, I am pleased to say that we have completed the consolidation of our restaurant support centers. This plan has promoted greater cooperation, collaboration and communication across the organization. The move has also enabled our team members to more effectively share ideas on how to make our brands more distinctive and relevant which is just what we need right now. This is a very challenging time for our industry. Today consumers are very sensitive to value stemming from tighter budgets. In addition, slower growth in disposable personal income has influenced how much they spend on dining out. The already challenged restaurant industry has been hit with slowing overall economic growth and the gap between the cost of dining at home compared to dining out. The result has been a high level of promotional activity in the marketplace competing for consumer attention. But…

Thanks, Julia. Good morning, everyone. I will provide a brief summary on the third quarter's financial results starting with the income statement. Adjusted EPS in the third quarter was $1.46 compared to $1.43 in the same quarter 2015. The increase was mainly due to lower weighted average shares outstanding, lower income taxes and a decline in G&A mainly driven by significantly lower incentive compensation costs compared to the third quarter of 2015. These items are partially offset by a lower gross profit. The year-over-year decrease in gross profit was mainly driven by a 5.2% decline in Applebee's comps and incremental investments to test additional Applebee's marketing programs which we discussed with you last quarter. Development by our [indiscernible] franchisees over the last 12 months and favorability in mix partially offset these factors. Switching gears to G&A, G&A for the third quarter of 2016 declined by $5.6 million to $36 million compared to the same period last year mainly due to significantly lower nonrecurring costs associated with our restaurant support center consolidation and more incentive compensation accruals due to the comp sales performance at both brands in the first nine months of the year. Regarding our tax rate, the tax provision in the third quarter of 2016 was lower compared to the same period last year due to favorable foreign return to provision adjustments that lowered the effective rate and an unfavorable adjustment to tax reserves recorded in the third quarter of 2015 that raised the effective rate for that quarter. Turning to the cash flow statement, cash flows from operating activities were approximately $62 million for the first nine months of 2016 compared to $71 million for the same period last year. The decrease in cash from ops was mainly due to net changes in working capital which used cash…

Thanks, Tom. To summarize, we again delivered growth in adjusted EPS despite a difficult environment and soft comp sales. We also continued to generate strong adjusted free cash flow. We completed the consolidation of our headquarters and were enthusiastic about having the teams for both brands under one roof. And at both brands, we're adapting to a challenging environment by relentlessly reinforcing our value proposition and having an even sharper focus on operations to continuously improve the guest experience. We're acting on our comprehensive plan to restore positive comp sales and traffic at Applebee's and we're executing against our strategy at IHOP to build on the brands' momentum. We're taking action to drive positive and sustainable sales in traffic with a renewed focus on value. Lastly, our business model is more scalable than ever and we continue to thoughtfully explore strategic acquisitions to leverage our shared services platform and superior franchise partners. In closing, we're motivated to meet and adapt to industry challenges while building a solid foundation for future growth and we will continue to return cash to shareholders through dividends and share repurchases. Now Tom and I would be pleased to answer your questions. Operator?

[Operator Instructions]. And our first question is from Michael Gallo from CL King.

Just a question on wood fire grill, I mean obviously it has been out there now call it six months. You haven't really seen traffic improve. Obviously the industry is a big part of that. But I was wondering if you speak to how you kind of balance what you are doing in terms of improving product quality which was I think a big part of wood fire grill but also still delivering value that your customers are clearly looking for right now? How you sort of dovetail those two together and how you evolve wood fire grill in order to be a better traffic driver? Thanks.

I think that is a great question and I think there is lots of lessons learned but I think at the core, the whole notion of wood fire grill is impact0ing over 40% of the actual menu items in terms of taste and profile and it is also improving the quality of the steak. Those perceptions don't happen overnight as you know in casual dining. It is not as if people are coming in four times a month. It takes awhile to enhance and change perception. And so we're comfortable and confident that the feedback we're getting on our proprietary research we know that our consumers really do feel differently about our product quality but that takes time. So we recognize that in the interim as I said, we have to do a better job of communicating that value message obviously with our operations improvement and our brand relevance improvement making that value proposition a much stronger communication vehicle. We have to do that work but we know that hand cut wood fired was absolutely the right thing to do for the long term perception change, it just takes time.

Our next question is from Chris O'Cull from KeyBanc.

On the last call you indicated the lack of a strong value message was really the primary reason for the mid-single digit comp declines and I think you guys made some adjustments this quarter. Yet the relative performance to the industry deteriorated. What do you think you missed on the value message that you ran during the third quarter? Why do you think it didn't resonate?

I think as I said in my prepared remarks, we've got to validate the best approach to use in terms of the stronger value messaging and we do believe that is a core factor but we think there is an opportunity to improve both that messaging and how it comes to life in the restaurant and that is the work that we're currently doing. I think this whole operations piece which I spoke of earlier is an important piece. The consumer has very high expectations of what they want, not just in terms of consistently a great experience but the real value for the money and that is work we're both looking at and validating as we speak.

I noticed some of your competitors were running lunch offers that were lower-priced. Has Applebee's considered anything similar kind of program?

We have been looking at lunch. I know it is not our number one priority. I think our number one priority is getting at this stronger value messaging and validating it. But I think lunch is something we can do. Clearly if we were to do a different lunch strategy, it has got to be a smaller menu. We just simply can't serve all 80 some dinner items at lunch and we recognize that. But it isn't our number one priority right now. Our number one priority is to get us back on track at dinner.

Okay and then Tom, this year there were some timing mismatches from the extra operating week when you project free cash flow. Are there any adjustments we should be considering for next year when we're projecting free cash flow?

No, not that we're aware of right now. We're still working through 2017 as part of our planning process right now so we will be getting back about that.

Okay. And then lastly given you guys just had your conference with Applebee's, Julia, can you talk a little bit about agreements that these guys have for renewal? I know that many of them were opening restaurants in the mid-90s and they signed 20-year agreements. Can you speak about franchise willingness to renew agreements and have there been any renewals that has happened here recently?

So what you are referring to is the big renewal push which is in 2020, 2021, 2022. So that is a ways out. I think I mentioned that a couple of times before. We have our ongoing normal renewals that happen in the course of the year at both brands, nothing extraordinary or exceptional in terms of numbers.

Our next question is from Brian Vaccaro from Raymond James.

So I wanted to follow up on Chris's question on lunch versus dinner. Did you see a noticeable difference in daypart trends in the third quarter that you could provide color on?

No, there really weren't any major changes either by daypart or by area of the country. Nothing really that stood out.

All right. Then shifting gears to the broader guest satisfaction scores, I think on last quarter you had mentioned a pretty meaningful improvement in guest satisfaction at Applebee's. Did that improvement continue in the third quarter and where specifically are you seeing the improvement?

Yes, I would say in the third quarter it was more stable, we didn't see any kind of hockey stick in the third quarter, it was pretty much level set. We know there is an opportunity there and that is a real drive and focus for us operationally. We can and will do better.

And one more on Applebee's if I could. What is the average pricing that is running through the franchise system overall? I know it probably varies by region. But then also could you give an early read on your commodity and labor cost inflation expectations that the average franchisee could experience in 2017?

So you are asking about the average check, is that what you are asking?

Yes, check or pricing, however you would like to address it, yes.

The average check is $13.75 across the country. However, that is a little bit -- the Coasts, I think I've said this before, are substantially higher than $13.75 so it is a little bit of a mix. The middle of the country is slightly under $13.75 and the Coasts are slightly higher. That is a little bit of the nature of the beast and the cost of labor. From a he standpoint of forecasting where we're from a co-op perspective for 2017, we don't have a forecast yet but at least preliminarily it would be down. It looks very good in 2016 and again it looks very good in 2017. I will have a final number for you on our guidance but at least preliminarily it would be once again very favorable for the franchisees.

Okay and a similar sort of backdrop from a labor cost to inflation perspective in 2017 versus 2016. Is that your early thoughts on the labor front?

It really depends on the state you are in and whether or not -- there is obviously the federal changes and there are the state changes. It varies dramatically. The one thing I haven't seen a huge change in although there are a lot of state legislation and in-fighting, I am not seeing a huge change in ours. Still we have eight or nine tip credit states that looks like that stays in play. I'm sorry, I mean eight or nine states that do not have a tip credit but in general, that is a bit of a -- if nothing it will be more aggressive not less aggressive. Labor is an ongoing issue.

Sure. And then just one last one for Tom on the networking capital use of cash you called out in the quarter, did that include the $10 million one-time tax payment?

This is Gregg Kalvin. Yes, it did. It is in the press release, Brian. We paid $7 million of the $10 million and revised the guidance for the difference of the $3 million potentially is what we settled at. All in Q3.

Our next question is from John Ivankoe from JPMorgan.

Just a few if I may. Julia, I think it was also to Chris's question earlier about franchise renewals from 20 years ago. But my question is more around closures. One of the leading indicators of closures that we have seen in the industry in the past couple of decades is when franchisees slow down new unit expansion which is something that you have called out. So just hoping that you can kind of help us think the next couple of years if there is any kind of natural contraction of the system in the U.S. that may happen and if not if there is something that you are doing with financial incentives or what have you that could potentially prevent some closures given some recent results.

No, I would say over the last four years we have run an average of about 25 closures a year at Applebee's, that is pretty much standard. So I don't see any huge change. We run slightly less than that at IHOP, those are just natural either attrition of slowing or the trade area has moved away or I don't necessarily see anything extraordinary. In any given year, you can flow between 25 and 35 but there is nothing in the next couple of years that I would see on the horizon that is dramatic. As I said before, a lot of the renewals that you all are talking about with the aggressive expansion of Applebee's in the 1990s, those come calling in 2020, 2021, 2022. By the way that is the same exact scenario on the IHOP side, there is no distinction. They both had huge development in the 1990s so that is when you will see that change over. And we will certainly give you plenty of forewarning as to what that looks like and what that potentially entails when we get closer. It is just too far away.

And would just ask for your color just in terms of franchisees kind of talking about their store profitability or their organization profitability, I mean was 2016 was it like really a surprise to them in terms of what happened to comps? And just if you can speak generally or specifically, are most franchisees in a financially strong position to kind of withstand this?

Yes, I think that is sort of -- that is in ongoing -- I think I mentioned this before, we have a robust process for evaluating franchisee financial health. Our franchisees are smart, they are resilient business people, they've got experience in navigating ongoing industry headwinds. I think from time to time we have over the last 15 years, we have always seen from time to time a franchisee here or a franchisee there that has subpar financials but they are weathering the storm and we're working with them closely.

And then there was a previous question about if there is anything unusual in the cash flow statement in 2017? But I would like to ask the question in the context of deferred tax liabilities which actually has been a use of cash for the past couple of years. I don't know since 2013, 2014, it has actually been a very significant use of cash as that account has been drawn down. Is there a reason that may change in 2017 that is at least -- will it continue to be a use of cash or could that potentially start to become neutral?

This is Gregg again. It shouldn't change substantially in 2017.

The same process is at play.

It is pretty fixed as to what -- there are tax differences between the book and the tax. A lot of that has to do with the old IHOP sales of the old business model that will continue to draw down. We pay taxes on the money we collect off those notes if you will where we recognized them for both purposes years ago. So that will continue to come down in similar amounts as it has in previous years.

Finally, could you remind us, you have had on balance sheet cash non-restricted of $107.8 million. Is that all unencumbered cash and I guess what is the unencumbered cash if it is not that at the end of the third quarter that you could you for buyback or acquisition or dividend or what have you?

Let me say a lot of that is Applebee's gift cards.

That is the important thing to remember is that a significant chunk of that is related to the gift cards and then we spell out the amounts that are related to the securitization.

So is there a number that you could say in terms of what th0e unencumbered cash is of that $107.8 million? Or is that--?

A little less than half.

Yes.

Our next question is from Stephen Anderson from Maxim Group.

Just calling to ask about these SG&A, with your support center consolidation not completed, have you pinpointed any opportunities for further SG&A efficiencies?

We always look at SG&A on an ongoing basis and it is obviously a big priority. We want to make sure that we balance or are being conservative with SG&A with investing properly in the business at the same time. Both of those are important considerations but nothing dramatically significant in terms of that right now but we're always looking for opportunities to economize.

And we have a question from Chris O'Cull from KeyBanc.

I just had a couple of follow-ups. I wanted to follow up on the research process at Applebee's that you are conducting. When do you think we will start to see changes to the sales plan based on that research?

It is not necessarily research. It is a validation process. And boy, I wish I could silver bullet that, but I can't. I think the most important thing is we take the time to really validate how do we maximize our message going forward and make certain that we're meeting and exceeding consumers' expectations. So that process is going to take a while but we will certainly keep you updated.

I mean just ballpark, do you think this is something we could see the beginning of next year or the middle of next year?

Certainly ask me the same question on our earnings call on March 1 and we will provide you as much of an update as possible.

Okay. And then, do you guys have a large project planned for the fourth quarter that would call to meaningful acceleration on the CapEx? I think year to date it is like $3.5 million but were guidance is $8 million.

It depends on the timing when IT projects falls and things like that. So we will keep looking at that on an ongoing basis. CapEx stays at a relatively low level as you know on an ongoing basis.

I will now turn the call back over to Julia for closing remarks.

Thanks, Operator and thank you all again for joining us on the call. We're scheduled to report results for the fourth quarter and the full-year of fiscal 2016 on March 1, 2017 as I mentioned before. If you have any questions in the interim, I want you to feel free to call myself or Ken or Tom. Thanks much.