Welcome to the Q4 2017 Dine Brands Global, Inc. earnings conference call. My name is Paulette 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 will now turn the call over to Ken Diptee, Executive Director, Investor Relations.

Thank you. Good morning. And welcome to DineEquity's fourth quarter and fiscal 2017 conference call. I'm joined by Steve Joyce, CEO; Gregg Kalvin, interim CFO, Corporate Controller; Darren Rebelez, President of IHOP; and John Cywinski, President of Applebee's. 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 and involves known and unknown risks, uncertainties and other factors which may cause the actual results to be different from the results expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-K filing. 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 website. With that, I'll turn the call over to Steve.

Thanks, Ken. Well, good morning, everyone. Over the course of 2017, we took several strategic steps to stabilize and grow performance at IHOP and Applebee's. We shifted resources from corporate directly to the brands to provide greater autonomy and accountability. This has further enabled our two strong brands to quickly respond to changes in the competitive environment in which we operate. We've enhanced our leadership team in key areas across the organization, including brand leadership, culinary, operations and marketing. To accelerate sustainable growth, we believe that investing in talent is absolutely necessary. We've developed top-tier consumer insights and analytics to know who our guests are and to understand what they expect from us better than ever before. This information has provided support and validation to our decision-making process. To expand our base business, we invested in technology and growth platforms such as our to-go offering to develop incremental revenue channels to IHOP and Applebee's. I'm very pleased to say that our plan has produced improvement in off-premises business at both brands in 2017 compared to the previous year. Now, I don't want to give away too much for competitive reasons, but these are just a few exciting initiatives that are part of our strategy to return to growth. We continue to make good progress against our plan to stabilize and grow performance at both brands. With that said, I'm pleased to report the encouraging positive sales and traffic performance of both brands in January, with comps up approximately 5% at Applebee's and 2% at IHOP. While we have more work to do, I'm very confident in the steps we are taking to build on these early results and drive sustainable momentum. To achieve our goals, we must have a value-based performance culture. I firmly believe that leadership drives culture. We…

Thank you, Steve. Good morning, everyone. I'll briefly cover our financial performance for the fourth quarter and 2017 year-to-date before turning to our full 2018 performance guidance. For the fourth quarter, our adjusted earnings per share was $0.74 compared to $1.37 for the same period in 2016. The decline was mainly due to a decrease in gross profit from franchise operations as a result of lower Applebee's royalties not recognized until paid in cash, an increase in Applebee's bad debt expense, the impact of 2017 closures and increase in our contribution to the Applebee's national advertising fund, and a modest increase in G&A due to personnel-related costs. Please note that franchise operation expenses in the fourth quarter of 2017 were higher compared to the same period of 2016 primarily due to an increase in Applebee's bad debt expense and a $4 million franchisor contribution to the Applebee's national advertising fund. For the full year 2017, our adjusted earnings per share was $4.15 compared to $6.01 for the same period of 2016. The decline was mainly due to a decrease in gross profit from franchise operations as a result of the increase in Applebee's bad debt expense, lower Applebee's revenue due to a 5.3% decline in comp sales, an increase in our contribution to the Applebee's national ad fund, and royalties not recognized until paid in cash, the 2017 closures and a modest increase in G&A due to Applebee's brand stabilization initiatives, primarily in the first half of the year. Regarding our fourth-quarter GAAP income tax benefits, as a result of the Tax Cuts and Jobs Act legislation in December of 2017, we are required under GAAP accounting to perform a revaluation of our deferred tax assets and liabilities on our balance sheet to reflect the federal corporate tax rate reduction…

Thanks, Gregg, and good morning, everyone. I've previously categorized 2017 as a transitional year, perhaps even a foundational year, for Applebee's in terms of assessment, strategies, structure and, of course, execution. While we anticipate our initiatives – anticipated our initiatives beginning to gain traction in Q1 of 2018, we're certainly pleased to see early results materialize in Q4. From a strategy perspective, we have returned to our roots. We have embraced Applebee's core DNA as a neighborhood place folks come to connect with family and friends. We're a familiar welcoming and all-American brand and we love our position in the marketplace. We're comfortable with who we are and what we stand for and we simply wouldn't pretend to be an overly hip or trendy brand. We strive to be neighborly with abundant value and variety at our core and we plan to leverage these strengths moving forward. From a guest perspective, we have a firm grasp on both demographics and occasion-based insights. Said differently, we know who we're targeting and we know what drives purchase behavior at Applebee's and across the CDR category. Demographically, our guest profile is wonderfully diverse from an age perspective with an equal percentage of millennials, Gen Xers, boomers, which we view as a real strength. Importantly, our guests' household income ranges from $50,000 to $100,000, which certainly guides our culinary and marketing development process. Now, I've mentioned previously that we target routine traditionalists and value seekers, both of whom have tendencies and characteristics conducive to Applebee's preference. Without getting into detail, these folks represent our sweet spot and we're well-positioned to drive frequency here moving forward. As an example of getting back to our roots, chef Stephen Bulgarelli and his team are focused on mainstream and broadly appealing menu items for our guests. We're not…

Thanks, John, and good morning, everyone. IHOP's fourth quarter comp sales declined 0.4%, reflecting a decrease in our comp traffic that is consistent with category traffic declines, were not offset with check increases. Although fourth-quarter comp sales for the family dining category declined sequentially by approximately 70 basis points, IHOP's fourth-quarter comps improved by nearly 300 basis points versus third quarter. This improvement was primarily driven by strong growth in our to-go business, which accounted for over 6% of total sales in the fourth quarter, reflecting an increase of 100 basis points compared to the same period last year. We're very encouraged by the overall results of our off-premise business, which have also contributed to our positive sales performance in January. Turning briefly to development, our franchisees have opened an average of 61 restaurants annually over the last decade. I'm pleased to say that the pace of development continued at a very strong pace in 2017. Our franchisees opened 77 restaurants globally, of which 28 were international locations. This represents an impressive 25% growth in overall development compared to the ten-year average. This is a testament to the strength of our franchisee base and the strong demand for our brand both domestically and outside the US. To drive sustainable growth, we're continuing to execute our four-pronged strategy, which encompasses significantly enhancing the guest experience, running great restaurants, driving traffic to those restaurants, and being where the guest is. I'll touch on each of these briefly, starting with significantly enhancing the guest experience. We understand that guests consider many factors when deciding where to dine. Among them is atmosphere. To provide our guests with a warm and welcoming environment as well as drive traffic, we implemented the Rise 'N Shine remodel program, which is the most comprehensive in the brand's nearly…

Thanks, Darren. We have a clear vision and a plan to drive sustainable positive performance at both brands. While the positive sales and traffic results for January are very encouraging, we still have a lot of work to do. I've provided some high-level details on our comprehensive strategy to return Dine to growth and I am confident in the steps that we are taking to realize our full potential. We have not lost sight of our commitment to return capital to shareholders. We believe that lowering the dividend will provide for returns in the most efficient manner through share repurchases, while maintaining the highest dividend in the industry. To close, I look forward to updating you on our progress during the year as we continue to implement our go-forward strategy. For those of you who have not had the chance to register for our investor day being held in New York tomorrow at the W Union Square, please feel free to join us. You can contact Ken Diptee for details. Now, we'll be pleased to open the call to any questions you might have. Operator?

Thank you. [Operator Instructions] And our first question comes from Michael Gallo from C.L. King. Please go ahead.

Hi. Good morning.

Good morning, Michael.

Michael, your line is now open.

Yeah, congratulations on the improved results. My question is, I guess, for Gregg, given the $30 million contribution or roughly $20 million, $21 million incremental year-over-year – I know you called it out as a one-time in the press release. But, clearly, one, you're getting a significant benefit. I was wondering why you think that that will be enough. And then, two, are there offsets in the franchisee expense line in 2018 that are going to be more favorable in 2017 that's going to allow you to grow profit contribution despite that.

I'll take the second question first. Essentially, in 2018, because of the improved guidance and projections that we have, we should see less collectability issues, if you will. So, that will be a positive to the franchise expense line. You've got a lot of moving pieces in there because of the ad spend. But that will be the major positive event, if you will, going through that line, coming through. For 2017, we, obviously, experienced both on the revenue line, as we stated in prepared remarks and also through the bad debt expense, which flows through the franchise expense line, a historically higher amount which we expect to improve this year. Regarding the advertising, Steve is going to talk to that.

So, the advertising fund contribution is an important part of the overall strategy. There's no question. But when I came in, we made a commitment for both 2017 and 2018, which we are now fulfilling. We believe that we needed to make that contribution to get the story out about what we're doing and, clearly, we're getting some traction from that story. John and his team are using those funds to dominate the airwaves with 30-second commercials that we think are making a difference with programs that we think resonate with our customers and our guests. So, in our restaurants, we are seeing a difference both in traffic and in sales. And the contribution that we made and are making we think is vital to that. However, we think the ad fund, in and of itself, based on the way it's structured will be sufficient to continue the same type of momentum going forward. But as I mentioned, in 2017, we thought it was important. And John made the commitment to his franchisees that we were going to stand side-by-side with them and turn a positive story into a really strong growth story. So far, that seems to be working pretty well. And so, we have no anticipation of making a contribution beyond this point because we think we're getting the appropriate traction that we had hoped to get and we think we can build from here.

Yeah, Michael. This is John. The only thing I would add to that that's not an arbitrary figure. There's strong rhyme and reason and rationale behind that figure. We're putting it to use in a very specific manner, as Steve outlined. So, we anticipate results and our franchisees are fully aligned with this investment.

Just one quick follow-up. Do you anticipate that with the $30 million contribution, obviously, you're projecting positive comps. If I am rolling it in with all the closures, do you expect you'll have the advertising spending will be up in 2018 versus 2017?

Well, with our contribution, the answer is yes. It will be at the same levels. And then, going forward, we expect it to be at that level and higher.

Okay, great. Thank you.

Our next question comes from Stephen Anderson from The Maxim Group.

Yes. Good morning. Couple of quick questions. I wanted to – actually been tracking menu pricing and just wanted to ask if you have had any discussions with franchisees about menu pricing at both Applebee's and IHOP. What kind of range are you looking at? And I'll follow-up.

I'll start with that. But let me turn it over to both brand guys because they're much more integrally involved in this discussion. We believe our long-term success is all about value. And value is a combination of the service provided, the restaurant environment, the food in particular, and – overall providing – memorable dining experiences. However, having said that, we believe value is and will continue to be a major segment of our strategy going forward on both brands. And we believe that makes us more relevant to our consumer and to our restaurant guest because they are a hard-working group that values their money and wants to see great value in the entire equation as part of what they expect. Look, we represent the 99%. We are not in a luxury restaurant business. We are in a business where we want people to frequent us many times during the month. And we want them to think of us as a quiet and a fun and an enjoyable respite in a world that is not. And so, as we think about that going forward, we need to continue to offer relevant things to our guests that make them want to come to our restaurants and the rest of it will turn into success. Darren, you want to comment?

Yeah, this is Darren. Stephen, we, on an ongoing basis, with our franchisees and counsel with them on approaching their pricing from a more strategic standpoint. I would say that the IHOP franchisees have been pretty savvy about this and probably a little bit ahead of the curve on taking some price perhaps a year, 18 months ago. And they've started to moderate that a bit more recently. Moving forward, we're really trying to work with them to be a little bit more strategic and dial in some more data into that analysis, so that we're staying within a relevant range versus our competition. So, it'd be difficult for me to handicap that at this point. But I would say that, to Steve's comments regarding value, we believe value is important. We're going to continue to work with our franchisees on balancing that value equation.

Okay. This is a follow-up question. You mentioned the potential looking – potentially looking at tuck-in acquisitions within the industry. And is there any one particular category, whether it be casual dining, whether it be fast casual categories that you would be looking at potential acquisitions?

Let me just move to – John, do you want to finish on Applebee's?

Sure. Steve, your question on pricing, look, we collaborate with partner franchisees frequently on strategy, right? They're all free to price as they see fit. We're cautious in this environment. There's a direct inverse correlation between pricing and traffic and we're fixated on traffic. So, that's our number one priority outside of executing at the restaurant level. Historically, you see brands in this category in the 1% to 2% range annually. We'd be on the lower side of that in terms of guidance to our franchisees. But, again, our focus is on traffic and we'll deliver value in a number of ways at the restaurant level.

So, to answer your question about where we're interested in going to add to our brands, clearly, we have the number one brands in both of our categories. So, casual dining and family restaurants. We've been number one for 10 years which is a pretty remarkable achievement. Now, we think both brands have enormous runway going forward. I've read a lot about the death of our categories. In fact, if you look at our numbers, half of our customers are under the age of 34. So, we think we've got quite a bit of run left in these brands. Having said that, we think complementary to our brands would be something in different categories. while we're just beginning that search, we're hoping to find something that fits us in terms of a relatively small, but accretive transaction that we can grow nationally. And the kind of areas we're going to look at, fast casual is obviously attractive to us, but also in terms of the actual brand itself, we like ethnic, we like healthy. So, you could see us having conversations with folks with small brands that fit those categories. And we're hoping to do something probably tail-end of this year, early next to start what we hope is a gradual transition to a multi-brand platform.

All right. Thank you.

Our next question come from Brian Vaccaro from Raymond James. Please go ahead.

Thank you and good morning. I had a quick question – detailed question on sort of the fourth quarter Applebee's franchise segment line items and then a couple of high-level ones if I could. Gregg, in the fourth quarter, what was the bad debt expense embedded in that 13 million-ish-and-change franchise expense. Do you have number handy?

Probably about – approximately $7 million to $8 million.

Okay. And then, as I think about your guidance for the franchise segment profitability, if we excel the one-time NAF of $30 million. Your guidance assumes an improvement in Applebee's franchise segment profitability as we're thinking about cash basis royalties and also bad debt expense. Did I hear that correctly?

Yes.

Okay. All right, great. I guess, this transitioning, I wanted to follow-up on the Applebee's sales improvement and maybe ask it through the lens of some of the consumer insights work that your team has done. You mentioned specifically the routine traditionalists and the value seekers. And, I guess, the question is, has the sales improvement in recent months been concentrated in one of these groups or has it been more balanced across, say, demographics or the Asian groups that you mentioned?

Hey, Brian. This is John. It's been very balanced, almost surprisingly so. We've seen it through a multitude of initiatives. We're pleased primarily with the fact that the growth is coming organically through traffic. From an occasion standpoint, it's both those kind of older folks who have some discretionary dollars as well as category or brand switchers within the category. And it's coming from Gen Xers and millennials as well. So, we're pleased with the diversity of what we're seeing. And more than anything else, we're pleased with the organic component of this. We haven't seen it in quite some time.

Okay. And you mentioned – as part of that, you mentioned the improvement in quite a bit, I think, of your guest satisfaction scores and different metrics. But could you maybe provide some more color on where you've seen the most improvement or where that improvement has been most impactful to the business?

We've seen it, Brian, on just about every – actually, we've seen it on all guest metrics. So, guest satisfaction would be – overall satisfaction would be at the top of that list, a meaningful – we'll call it – a 7 percentage point shift from 16 to 17. On the flipside of that, we track problems – guests who experience problems at the restaurant level. At one point, that was a double-digit number for this brand. It's down to about 5%. We're now expecting it to hover in the 4% to 5% range moving forward. And then, other attributes around speed, cleanliness, friendliness, engagement, hot food, quality food have all been moving in the right direction. And part of that is our effort to simplify on behalf of general managers and servers and to make their jobs a little easier. So, look, we've got formidable competitors and we're in a brutal category, but the evidence is very clear in terms restaurant level execution. All the attributes are moving in the right direction. And I attribute that to our franchisees.

All right. That's helpful. Just one last one for me. I wanted to circle back on the Applebee's franchisee profitability, if I could. I know there are a lot of initiatives to improve profitability and positive comps are a critically important factor there. But could you level-set, even at a high level where the average profitability stands today? And has it stabilized in recent months as the traffic and comps have improved or are we still yet to bottom on just sort of maybe store margins, et cetera.

This is Gregg, Brian. Consistent with the improvement in same-store sales, we're just going to directionally push it up, and especially at the franchisee level. In our level, also the collectability is important. And as this improves, we're seeing some positive signs in that area also. So, I think from both sides, things are looking up in the last three or four months.

All right. That's helpful. Thank you.

Our next question comes from Alex Mergard from J.P. Morgan. Please go ahead.

Hi. Thank you for the question. It's on capital allocation. And on your balance sheet, your debt has an expect to maturity in September 2021. So, with some of the incremental free cash flow from reducing the dividend or improved operations, is it your expectation at this point in time to reallocate any of that to debt paydown or what should we be thinking on that front?

So, I think our approach is we think we're at an appropriate debt level. We like the space sort of in the 5 to 5.5 category. We, obviously, want to see our – we want to restructure our debt. That's something we've actually already started discussions on. We will time it based on both pricing in the market, but also when the appropriate offers are made to us. So, we're looking at that probably over the next year to determine the right timing. We've got a well-structured debt position today. But, obviously, it does have maturity in the midterm. And so, our view is we don't want to wait till the end of that. We want to sort of start thinking about it at this point. And our structuring will be based on both the market, the pricing and what we think the appropriate debt levels are for our company. But let's be clear, we're very comfortable where we reside today. And so, at these levels of leverage, because of the stability of our cash flow, we think it helps us optimize the balance sheet and you'll see us continue to do that mostly in terms of – as we generate cash and begin to de-lever, we will figure out ways to get that cash to shareholders because that is our number one priority. And then, we'll also look for investing in the brands and growth.

Okay, got it. That's very helpful. Thank you for that. And then, just one follow-up. So, on the IHOP rental income stream, it's my understanding that a lot of that is derived from your strategy that was really developed back in 2003 in prior time periods. So, as those franchise face lease expirations, to this day, are you still trying to renew those sub-lease agreements with your franchisees and essentially stay in the middle on them?

This is Gregg. Yes. As those renew, they go into a new lease and we continue with our process under the old business model. If the store closes ever, then it goes to the new business model. But most of those stores, there's probably over 700 of them that have those leases. We would continue with a new lease, if you will, into the future.

Thank you.

[Operator Instructions]. And we are showing no further questions. I will now turn the call back to Steve Joyce for closing comments.

So, thank you for joining us. We are clearly excited about the results generated and for reporting to you throughout the year as we continue to make progress. We are very satisfied with our results to date. But we also believe that the bulk of our work is in front of us. And we look forward to reporting that out to you as the year goes on.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.