Welcome to the Third Quarter 2017 DineEquity Inc. Earnings Conference Call. My name is Sylvia 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. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Ken Diptee. Ken, you may begin.

Good morning. And welcome of DineEquity's third quarter 2017 conference call. I'm joined by Steve Joyce, CEO; Gregg Sullivan, Interim CFO and Corporate Controller; Darren Rebelez, President of IHOP; and John Cywinski, President of Applebee. Before I turn the call over to Steve, please remember our Safe Harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking, involved known and unknown risks and 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 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 our Investor Relations website. With that, I'll turn the call over to Steve.

Thanks Ken. Good morning everyone. I appreciate your interest and participation in today's call. So, first, I'd like to say that I'm truly honored and very excited about the opportunity to lead this tremendous company, which has such great potential. I assumed the role of CEO two months ago, and I've also -- but I've also been a member of DineEquity's Board of Directors for the past five years. During this time, I had developed a deep understanding of the company, the business, and most importantly, our two incredibly strong brands. I've come to realize many of the strengths, weaknesses, and opportunities before us. And as a Board member, I also have insight into what has worked and what has not. I have almost 40 years of experience in the hospitality and food and beverage industries, combined as well with international development. With over 30 years of working with franchisees, I've developed a deep understanding of what makes a successful franchise or franchisee relationship. I'm looking forward to working further with my talented senior management team to strengthen the efforts already underway to build on a partnership with our franchisees. When I became CEO, I knew that positioning Applebee's and IHOP for long-term growth would require some heavy lifting. I also know that we have dedicated franchisees and communicated members that are up to that challenge. I am extremely optimistic about our future and realizing this company's full potential and long-term success. I will judge this success by one measure and that is total shareholder return generated over the next several years. Our first priority will always be the most efficient return of capital to shareholders. Now, realizing our full potential will not happen overnight, it is certainly achievable with a change in our philosophy of what DineEquity is. We…

Thank you, Steve. Good morning everyone. I'll briefly cover our financial performance for the third quarter, before turning to our live performance guidance for the remainder of 2017. For the third quarter, our adjusted EPS was $0.91 compared to $1.46 for the same period of 2016. The decline was primarily due to a decrease in gross profit from franchise operations as a result of lower Applebee's revenue due to 7.7% decline in comp sales, royalties not recognized until paid in cash, and an increase in Applebee's bad debt expense, the impact of 2017 closures, and a modest increase in G&A due to personnel-related costs. I would like to point out that the franchise operation and expenses in the third quarter were higher compared to the same period of 2016, primarily due to an increase in Applebee's bad debt expense and a $4 million franchise or contribution to the Applebee's national advertising fund. As discussed on our last earnings call, we expect to contribute an additional $4 million in the fourth quarter or $8 million during the second half of 2017. Finally, as an update regarding the $10 million in costs associated with the Applebee's stabilization initiatives, we've discussed previously approximately $8 million was incurred in the first nine months of 2017. We expect the balance to be incurred in the fourth quarter. Regarding our third quarter impairment charges. In the third quarter, we incurred non-cash impairment charges totaling $532 million related to the write-downs of both Applebee's goodwill and other intangible assets. The impairment charge consist of a $358 million related to goodwill and $173 million related to other intangible assets. The impairment of Applebee's goodwill is not deductible for federal income tax purposes, so there is no tax benefit associated with it. We did recognize a deferred tax benefit…

Thanks Gregg and good morning everyone. As anticipated, Q3 was a challenging quarter for Applebee's, in particular, our national media spending in Q3, represented a very unfavorable comparison with the same quarter last year. Additionally, we are [Indiscernible] more weeks in the quarter when compared to year ago. Now with that said, we remain focused on our 2018 turnaround plan, as we expect to see our initiatives to take hold beginning in Q1. In fact, we saw a change in our trajectory here on October, through a combination of new initiatives. We supplemented the ad fund with $4 million contribution, we reintroduced, eating good in the neighborhood, our new company, with some terrific new advertising. And we focused on our core 2 for $20 value proposition, with the beverage underway. And for the first months, since about middle of 2015, we saw positive traffic and sales growth in October. On another positive note, we just concluded our Applebee's Conference and our franchisees are both confident and optimistic as we look to next year. We outlined our turnaround strategy, as well as a comprehensive 2018 plan, and we have franchisee of alignment in support of all components of this plan. Most importantly, we once again have the proper lead time required to execute at a consistently high level, particularly at the restaurants. And simply categorize our partnerships with franchisees as the best that's been in years and one of the primary reasons I'm very bullish about our future. Speaking of franchisees, I'd like to take a moment to recognize our largest franchisee, Apple American Group, who we've just announced as our 2017 Franchisee of the Year. I'm proud of Greg Flynn and his team because they consistently walked to talk in all key operating metrics, and they really represent the brand…

All right. Thank you, John and good morning everyone. IHOP's third quarter comp sales declined by 3.2%, partially reflecting the continuation of soft industry conditions, specifically one of the steepest quarterly declines in family dining comp traffic over the last two years. IHOP's results were primarily driven by that decline in comp traffic as well as underperformance in the dinner day part; due to cycling of successful kid eat free promotion in 2016. Despite the declines in both categories sales and traffic this year, development by IHOP franchisees continues at a very solid pace. Franchisees opened a total of 50 restaurants globally gross in the first nine months of 2017. This represents a 108% increase over the same period last year. I'll provide more details on our development results later. Our top priority at IHOP is to rebuild sales and traffic momentum by executing against a broad four-pronged strategy, which includes significantly enhancing the guest experience, running great restaurants, building and driving traffic, and being where the guest is. I'll briefly discuss each of these, starting with game-changing enhancements that guest experience. We know that the atmosphere in our restaurant is an integral part of the dining experience. We've added a dedicated consumer insights team to conduct in-depth analysis to better understand who our guests are, what matters to them, why they care about the brand? And what role our great food plays in their lives. Through this work, we know that value is top of mind for everyone and guests expect a great experience based on the strong brand equity we build with consumers, across a very broad age demographics. Make no mistake, we are more attuned with our guests than ever before, and our focus is to drive higher frequency among our existing IHOP guests. Providing a warm…

Thanks Darren. Well, obviously, we're very excited about creating this company into a dynamic enterprise, which is going to be great things. And we're working with a talented and seasoned management team. We have the best franchises in the business, who have demonstrated their commitment to success and confidence in our long-term growth plans. We have a lot of work ahead of us, as we execute on our strategies to establish a performance-driven culture, driving sustainable sales at both brands, and return DineEquity to a growth company. As I said on the second quarter call, I think we're going to do a lot of different things that will add value. We have tremendous assets that needs some adjustments and we're looking forward to providing comprehensive updates on our progress. We're going to give you a vision for the company going forward early next year. I'm enthusiastic about the opportunity to realize the company's full potential and I feel very confident in the steps that we're taking to achieve that. With that, let's open it up to any questions you might have. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Stephen Anderson from Maxim Group.

Yes, good morning.

Good morning.

Certainly, taking a look at the comp improvement we've seen so far in the quarter. I just want to ask, can you pin down how much of the improvements, as well as effect that you saw in the third quarter from the two hurricanes we've had?

Hi, this is Gregg. The effects were pretty minimal to our businesses. The amount of time the stores were closed down versus when they reopened was relatively quick and there's usually a bounce back in people coming out after the restaurants reopened. So, very minimal on the sales line for the quarter.

Okay. But going to fourth quarter, we saw that track come out late last night up 1.4% on casual dining. And looking at that, we saw some big gains in Florida and Texas. So, I just want to see of the sales and traffic gains in the quarter, can you attribute some of that from the hurricane recoveries?

No. Actually I think where we feel we are now is what we're doing is working. October does that make the year, but we're pretty positive about what happened in October. But we think we were attributing it to -- in both of our brands, we're doing better marketing, providing better value, running better restaurants and capturing the customers' interest with some really interesting approaches to not only our advertising, but also the food that we're serving in the restaurants. And I think, look, our brands represent the 99%. So, we think anything that's positive in these categories were obviously going to benefit from. But we attribute it mostly to things we're doing that are making a positive difference.

All right. Thank you.

Our next question comes from Michael Gallo from C.L. King.

Hi, good morning. I just want to echo positive signs of stabilization, good to see it early in the game here.

Thank you. Good morning.

Good morning. Stephen, just I know this may be this is still to be unveiled when you think about your vision for each of these companies, but you've been on the Board for some time. You've seen the positives and negatives of having these brands together. Obviously, you'll have an opportunity with call on the securitization goes away in the spring, any high level thoughts on whether you think ultimately these brands benefit from being together? Don't benefit from being together? Whether it might make sense at some point to split them apart? And just some thoughts on maybe it's too early to answer, but some high-level thoughts there would be helpful. Thanks.

It's not too early at all. So, let me tell you something. Franchise business is about scale. Scale allows you to balance your costs over a larger number of units. The incremental value of a unit to us is almost entirely profitable. This business is a scale business, you can expect us to grow that scale, not shrink it.

Great. And then just want to delve in on IHOP a little bit. Obviously, you said a little bit more of a challenging year relative to some of the prior years. You've had some success To Go, but it's just seems the promotion since you changed the advertising campaign last September, it just seems that it's gone from outperforming the category for a long time to underperforming. I was wondering whether you might look at the same evaluation regarding the ad campaign. And how effective that is as you're undertaking it at Applebee? Thanks.

We're really focusing on a number of things to positively drive that. As I mentioned, last quarter, we made a change with our Chief Marketing Officer and brought in someone who's got nearly 20 years of experience in that role. And then, we further went on, as I've mentioned just a few minutes ago, to replace our ad agency to arguably the top creative agency in the country. So, we've got a lot of great food. We've got great service in our restaurants. We're remodeling restaurants and creating a new and more contemporary atmosphere and we felt like we really needed a top-notch agency to highlight all of those changes in our restaurants and that's what we've done. So, we absolutely expect to see better results in the coming quarters as a result of that -- those changes.

And we think all those things are going to drive what is already brand that everybody loves. But one of the things that we're focusing on, which we think is important and we've heard from our consumers is, we're going to provide greater value than ever. And so that value concept communicated well in a way that's fitting of this brand, is just going to reignite this brand to levels that it should be at and we think we're starting to see results already.

Great. Thank you.

Our next question comes from Brian Vaccaro with Raymond James.

Thank you, and good morning. So, it's pretty encouraging to see the traffic and sales rebound in October, especially at Applebee's. And John you mentioned a few initiatives, but I didn't hear any attribution to the dollar reader promotion. Could you provide some color on how that promotion performed? May be some perspective on both sales and profitability during the month of October versus the past three to six months?

Hey Brian. Good morning. As much as I'd love to, look just for competitive reasons, we're not going to delve into any detail here. Suffice it to say, the combination -- really this -- from all of our qualitative and quantitative work, this new advertising, which is basically a formula that we've used previously around eat in good the neighborhood with great success is resonating, our value proposition is resonating both on the food and beverage side, and we're lined up for 2018. I'm a little surprised by the early traction in October, but we expect all of these initiatives on all fronts to hit beginning in Q1 and frankly, early Q1. So, I'm going to resist the temptation to disclose any detail for competitive reasons, Brian, but I know you understand that.

But we can also say, look, there are three or four factors that are contributing to that change. And so, first of all, the advertising, as John mentioned, is resonating much more with consumers than what we're doing previously. We sold more 2 for $20 than we've sold in, I think, in the history of the brand. That program and offer clearly is driving people into these restaurants. And then we've had successful promotions as well. So you can expect us to continue all of that, and you can expect we think that all that is the formula for putting us on a positive, sustainable sales growth going forward.

Okay. Would you be willing to disclose your alcohol sales mix in the quarter?

Brian, look, our alcohol mix generally speaking is in that 14% to 15% range, on an annual basis. And I honestly wouldn't disclose any detail beyond that. Frankly, I wouldn't even have it at my disposal. But we're pleased with where we are, on both the food and alcohol front.

Yes. And by the way, we think the bar is an opportunity for us, because we think we can move that needle.

All right. Fair enough. And you mentioned the advertising weights were down pretty significantly in the third quarter at Applebee's. How did that comparison look in October? Was that also part of it the weight sort of normalizing year-on-year? And then also, fourth quarter, is advertising weights going to be up year-on-year? Another down quarter, any perspective there would be helpful.

Hey Brian. I think you nailed it. Q3 was bit of an anomaly. Year-over-year, Q4 is back to kind of a normalized year-over-year comparison. I wouldn't call it an increase year-over-year, but stable. It's probably the best way to categorize it. Again we don't have those issues moving forward into 2018. So, very bullish as we look forward.

All right. And shifting gears to the guidance. The adjusted free cash flow guidance lowered pretty meaningfully on a reduction in the franchise segment profitability. And as you parse down and drill down on the fourth quarter, it implies an even greater year-on-year decline; it would seem, in the Applebee's franchise segment profit. Can you help parse that out between sort of the cash basis royalties and the collectability there versus maybe the bad debt expense?

This is Gregg. They're all in effect on our cash, if you will, whether it's a bad debt or not collecting it in the first place, because it's either way, it relates to collectability. So those items that are projected for the rest of the year, plus we mentioned in our guidance, that we're going to have some additional weighted marketing spend on a cash basis in the fourth quarter. Those two items is what -- is what's driving the revision of the adjusted free cash flow to where we're comfortable with it for the rest of the year.

And they're roughly in equal weights.

Yes essentially. Having been in this business a long time, I can tell you this, the way to improve your receivables and collectibles is to have your franchisees make more money, and that's what we're doing.

Okay. Just to be clear of that. So, the NAF [ph] contribution that you're accruing in the expense line, Applebee's franchise expense, I think that was $4 million in the third quarter, will that also be $4 million in the fourth quarter? Or is it going to be more than that because of what you just said on the cash spend on ad spend?

Our contributions will be $4 million in the fourth quarter also. So, $8 million for the whole year -- for the second half of the year.

But that fourth quarter is in advance, not an expense. There's part expense and part advance. So, the $4 million income statement hit in the fourth quarter, it will go through franchise expense. And like I said earlier, we're also advance spending some money on the marketing from our cash for marketing spend in the fourth quarter, there will be incremental to normal run rates, if you will.

Okay. All right. I'll follow-up offline on that. And then the last question on the IHOP unit growth outlook. I know this has been the best year in a while on the unit growth. I guess if you look at the next few years, where do you see net unit growth trending, given you're at nearly 1,800 system units, most of those domestic? And I guess, maybe your latest thoughts on the total ultimate domestic opportunity? And the last piece of it; is part of the comp weakness at IHOP you think related to intensifying cannibalization? Thank you.

Yes, Brian. I'd say, well, just to correct one of your numbers. We have around 1,650 domestic restaurants. So, a little bit less than that 1,800 that you were citing. But we absolutely believe we have more room to grow. And we're not seeing the comp -- challenges come from cannibalization. Because our franchisees are the ones that really are driving the development. So, they're less inclined to cannibalize themselves. So, we're seeing good incremental growth there. The other channel that we really think gives us a lot of upside is the nontraditional channel. And it's really allowing us to penetrate some areas that we traditionally have not gone after. But our guests are telling that they want access to the IHOP brands. So, we have -- we're pretty bullish on our growth moving forward and we think we can do that without cannibalizing our existing restaurants.

So, -- and I guess the way we think about it is, we think we've got a long runway for IHOP domestically, but also more importantly, that brand is incredibly in demand globally. So, there is just a strong interest in almost -- on every continent. And so you're going to see us talking in the future about -- we're in discussions on several multiunit deals. We don't have anything to tell you at this point, but it's one of the many nice surprises I've got since joining this company, is seeing the demand for our brands, particularly IHOP internationally.

All right. That's helpful. Thank you.

Our following question comes from John Ivankoe from JP Morgan.

Hi, thank you. There's some initial comments made that the success of this business was going to be around driving total shareholder return. To state the obvious, it's a combination of dividend and capital appreciation. Your dividend is extremely high, very, very close to what -- given year's net income is, but you do have some cash on the balance sheet. So, can you -- there's different ways to be basically top this, I mean you can imagine a situation where meaningfully lower dividend allows you to reinvestment your business in the short-term in order to drive long-term value of the equity, and where you can also imagine that more the TSR would be driven by the dividend itself. So, since you brought that up, and you want to be measured, by total shareholder's return, that's obviously very different ways to get there between dividend and capital appreciation. I was hoping that you could elaborate on that.

John, this is Gregg. As we've done consistently, our Board and management evaluates the payment -- the rate of the dividend every quarter. And we have an existing dividend being paid next, early next year. But it's always a careful thoughtful evaluation as to how to deploy that capital. As far as the cash goes, we -- I think we've said that probably about half of our cash on our balance sheet is -- or more is related to gift cards and advertising money. So there's probably -- at the end of the third quarter, there's probably about $40 million or $50 million of free cash, if you will, the rest of it is really tied up in those funds, if you will, that are here for specific purposes. And it's been that way for a while. So there's not a huge amount of cash that we have at our disposal at any point in time for that. But about half and half is what it is. And the dividend is, as I've said, is -- will be evaluated quarterly.

So, right now we don't have -- we're happy with our position. We obviously going to continue to reevaluate it. I measure my performance and this company's performance and this management team's performance by what we give to shareholders. And so we are -- our model, we're going to continually reevaluate how we allocate our resources. But what we are going to do long-term, that you can count on, is we're going to do either most efficient company in terms of how we deliver value to the shareholders. So, as environments change and lots of things are in the mix right now, who knows what's going to happen on the tax bill, there's a whole bunch of different things that could change our outlook, but right now, where satisfied with where we are and we'll continue to update you on where we think we're going.

Thank you for that. And then secondly, as you're talking to the franchise community and they're making their 2018 plans, the industry doesn't have a lot of pricing power, labor costs in certain markets are actual problem. Commodities aren't going down like they used to, where they did for a couple of years, may be they're even taking up depending on the commodity. It's hard to see a path where franchisee profitability will be up 2018 over 2017, so just hoping to kind of get your comments on that. And just your sense on the overall franchise community of how they're looking at your cost structure in the middle of the P&L and whether that influences their willingness or ability to reinvest at the levels that you would like them to?

Yes. So, we've got several things working on that front. We actually think -- we're pretty optimistic about 2018 at some of our franchisees. We had -- we just had our convention, and the Applebee's folks during the general session, were voting on a number of questions we're asking. One of them which was, how do you think we're going to do in 2018? And their response was uniformly positive that we're going to do well. So, there are some things on the cost side that we're doing. We're trying to drive efficiencies around labor because you're right, labor costs are not going down. We're trying to drive efficiencies around our buy and that is the Pricewaterhouse study that was mentioned earlier. We think that's going to yield -- well, we know it's already yielding positive results, but we don't have the final. We've got a very aggressive target for the benefit of that study. And at this point, we think we're going to achieve it. And so -- but the other big thing is, we're going to drive traffic. And if we drive people into those restaurants, we're going to make more money. And that -- it doesn't get any simpler than that.

So, just two related points. One, your belief that Applebee's drive traffic in 2018, is that conditional on the belief that the industry bar and grow casual dining, however you want to define it, drive traffic in 2018?

Look, I think we're going to outpace the industry. But we cannot -- if the industry is not in a reasonable environment, then we're not going to drive -- we're going to generally follow the industry, but our plan is to outperform the industry. So, wherever you're going to put the industry; put us above it.

Okay. Sorry. No, thank you for that clarification. And then a final question, when you and the franchisees look at your menu, your average ticket relative to traditional and non-traditional competition, how do you feel about the average ticket? And do you have opportunities up or down on average ticket in 2018 versus 2017?

We think in both brands our greatest opportunity is to drive more value for the consumer, and that's what we're planning on doing.

Yes, John, this is John. Look, we're much more fixated on traffic than we are check growth, and when we look at 2018 quite frankly.

This is Darren. I'll reiterate the same thing. We've got alignment with our franchisees around focusing more on more sustainable value proposition, that's what we're working on right now.

Thanks.

And our final question comes from Stephen Anderson from Maxim Group.

Yes. So, just want to follow-up on comments about your contribution to the ad fund. And as you think about 2018, do you -- can you comment you had about -- whether you'll see any additional contribution for 2018?

This is Gregg. We don't give guidance right now for 2018. We carefully evaluate everything that we need to assist our franchisees and the business overall. And so we wouldn't comment on that right now. But we will -- when we go out with that guidance, you will know.

All right. Thank you.

Okay. So, thank you for interest. Thanks for participating on the call. We are, obviously, very excited about where we are now, but also, more importantly, where we're headed. And we look forward to sharing that with you over the next several quarters. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.