Dine Brands Global, Inc. (DIN) Q4 2018 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter 2018 Dine Brands Global Incorporated 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 of Investor Relations. You may begin.

Good morning and welcome to Dine Brands fourth quarter and fiscal 2018 conference call. I'm joined by Steve Joyce, CEO; Tom Song CFO; Darren Rebelez, President of IHOP; John Cywinski, President of Applebee's; and Greg Kalvin, our Corporate Controller will be available during Q&A as well. 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 are 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. Please evaluate the 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 and assumes no obligation to update these statements. We may also refer certain non-GAAP financial measures, which are described in our press release and available on our website. With that, I'll now turn the call over to Steve.

Thanks, Ken. Good morning everyone and thank you for participating today. In our press release issued this morning, you saw that we finished a strong year with a very solid fourth quarter results. We continued to deliver year-over-year double-digit growth across key metrics including total revenues, gross profit, adjusted EPS, as well as adjusted EBITDA. My initial full year as CEO of Dine Brands was a transformative year for the company. We stayed the course and executed against a multi-pronged strategy focused on returning Dine Brands to a growth company. With the performance-driven value-based culture firmly in place, I'm very confident in our go-forward plans. Following our transitional period in 2017, this year was dedicated to enhancing brand relevance and building momentum at Applebee's and IHOP, while driving growth. To that end, I'm pleased to report that both brands achieved positive comp sales growth for 2018 and this momentum continued into January. While Darren and John will go into more brand-specific details a little later, I'd like to highlight several of our notable achievements this past year. First of all, we returned to nurturing a winning leadership team and trusted franchises. We increased investments in research and consumer insight; we are enhancing guest and team member engagement through consumer-facing technology and CRM; we have a focus on traffic-generating menu innovation and abundant value and giving everyone a reason to visit of our restaurants; we are accelerating restaurant unit growth; and we are also accelerating in big numbers on all premises business. On the Applebee's front, there was a marked improvement in overall Applebee's franchisee financial health and nearly all Applebee's franchisees agreed to temporarily increase their advertising contribution rate by 75 basis points to 4.25%. Additionally, Applebee's achieved the highest quarterly comp sales increase in 14 years in the third quarter posting growth of 7.7%. Turning to IHOP, our franchisees and area licenses developed 34 net new unit domestic restaurants, marking at least a decade of consecutive net development growth. IHOP returned to positive comp sales in 2018 and ended the year with a very, very solid quarter. The brand also took innovation in the next level creating the most Buzzworthy media campaign in its history with the ultimate state burger launch. Additionally, both Applebee's and IHOP reached all-time highs in their overall guest satisfaction scores. And lastly, both brands experienced strong growth in their off-premise business. Regarding Dine overall, our highly franchised model produced stable and robust adjusted EBITDA margins of approximately 45%, excluding advertising revenues. There was a substantial year-over-year decline in bad debt expense compared to 2017 and we significantly upsized our VFN to $225 million from $100 million, which gives us much more financial flexibility. These accomplishments to name a few have helped to better position us for long-term success and provide a very solid foundation for us to build on. We have a plan in place, which we believe will sustain our current trajectory. Looking forward, we are very encouraged about 2019 and the years ahead. Importantly this year, we will provide a better picture of our untapped potential as it reflects a cleaner slate for several reasons, when we have a little bit of color. Notably, the $30 million contribution that we made to Applebee's national advertising fund was completed in the first half of last year and it is non-recurring. We have improved visibility into royalty collections. Additionally, we've reached a favorable settlement in December with one of our largest Applebee's franchisees, the terms among other things required the franchisee to pay us approximately $12.5 million for past due royalties and advertising fees in total. This plus the other resolutions have successfully resolved all of our franchisees issues for Applebee's. With the positive momentum of both brands, we are in a even better position to drive accelerated profitable growth with the continued strong support from our franchisees. We will focus on growth platforms, which are gaining traction. These include exploring significant opportunities developed in urban and rural areas, as well as leveraging non-traditional in small formats to penetrate higher cost trade areas and further embracing technology to enhance the guest experience. We believe our all-premise businesses at both brands can produce continued strong growth. For 2018, Applebee's and IHOP's off-premise comp sales increased by approximately 32% and 30% respectively, driven mainly by double-digit traffic growth. We also view of our international operations as a potential growth engine. Approximately 7% of our restaurants are outside of the U.S. The interest in our brands internationally remains healthy, primarily on the IHOP side. Most recently the brand expanded its presence into Thailand and announced plans to grow its footprint in South America under separate franchise agreements to build 25 restaurants in Peru and 12 restaurants in Ecuador. With that, I'm going to turn the call over to Tom to provide a little more detail on the numbers.

Great. Thank you, Steve. Good morning everyone. Our highly-franchise business model continue to produce impressive results. I'll provide a brief review of the highlights for the fourth quarter and full year, but before I do, I'd like to provide you with my perspective on our performance. Dine Brands finished very strong in 2018 with our adjusted EPS results exceeding the high end of our guidance by $0.12 per share. We have both brands performing at the top of their categories and near the top of the industry. We have prioritized the return of capital to shareholders, while our leverage has decreased. Later, I will review our guidance for 2019, which reflects the strong finish to 2018, their continued confidence in our company. I will start with the notable changes on the income statement. For the fourth quarter, adjusted EPS was $1.70 compared to $0.48 for the same quarter of 2017. The increase was primarily due to a 46% increase in the franchise segment profit, which is mainly driven by comp sales growth at both brands, a decline in bad debt expense compared to the fourth quarter of 2017, the collection of previously unrecognized royalties. For fiscal 2018, adjusted EPS was $5.37 compared to $4.09 in 2017. The increase was mainly due to lower income tax expense and higher franchise segment profit, which is primarily due to the higher comp sales at both brands and the favorable resolution of certain franchisee financial health issues, which resulted in lower bad debt expense and cash collections of previously unrecognized royalty revenues. I'm pleased to report that bad debt declined by approximately $13 million for 2018 compared to the prior year due to the marked improvement in Applebee's performance and the favorable resolution of these franchisees financial health issues just discussed. Importantly, for 2019, we anticipate that bad debt will now return to historical levels, which is a not meaningful level. Turning to G&A. Our G&A for the fourth quarter of 2018 was approximately $45.3 million compared to approximately $40 million for the same period of last year. The increase was primarily due to higher personnel-related costs, costs related to the acquisition of 69 Applebee's restaurants announced in December and increased legal expenses. The increase in personnel-related costs were related to performance-based incentive compensation. G&A for fiscal 2018 was approximately $167 million compared to approximately $166 million in 2017. As a reminder, there were some reprioritization at technology project during 2018 that also contributed to higher G&A. These items were offset by declines in severance costs and professional services costs. Regarding our tax rate. Our GAAP effective tax rate for fiscal 2018 was 27.4% compared to 20% for fiscal 2017. During 2018, we increased our tax provision by approximately $5.1 million related to adjustments resulting from IRS audits for tax years 2011 through 2013. This action increased our effective tax rate from what would have been an estimated combined federal and state tax rate of approximately 25%. Turning to cash flow statement. Our highly franchise model generated strong adjusted free cash flow for 2018 of approximately $141 million compared to approximately $66 million for 2017. The favorable variance was due to the increase in cash from operations due to higher net income, favorable changes in working capital and an increase in receipt from notes and equipment contracts receivable compared to 2017. Consolidated adjusted EBITDA for 2018 was $230.6 million compared to $221.3 million for 2017. The increase was primarily due to higher franchise revenues and gross profit in 2018 compared to 2017. I would like to highlight that both brands contributed to solid performance in 2018. The return of capital to our shareholders remains a top priority. In 2018, we returned a combined total of over $84 million to shareholders. To provide some color, we paid $51 million in quarterly cash dividends and repurchased nearly 479,000 shares of our common stock at a total cost of approximately $34.9 million. As you saw in our press release today, we increased our quarterly cash dividend by 10% to $0.69 per common share. The increase further reflects confidence in our business model, which generates stable and predictable cash flow. Additionally, our Board of Directors approved replacing our existing share repurchase authorization with a new authorization of up to $200 million. Now I would like to briefly comment on the implementation of ASC's 842 regarding new lease accounting guidance. We are required to adopt the new guidance effective in 2019. As a result and liability and an offsetting asset on the balance sheet, there will not be any net changes on the P&L and we do not anticipate any geography changes. Finally, I'll discuss the highlights of our financial performance guidance for fiscal 2019. Please see the press release we issued today for complete details on our guidance. We expect comp sales at Applebee's to range positive between 2% and positive 4%. At IHOP, we expect comp sales to be between 2% and positive 4%. Our comp sales guidance for both brands reflects the continued implementation of sales and traffic driving initiatives to drive continued momentum. Total segment profit, which excludes the company restaurant segment is expected to be between approximately $373 million and $394 million. Consolidated EBITDA is expected to be approximately between $268 million and $277 million inclusive of company restaurant segment EBITDA, which is as expected to be a range between approximately $9 million and $11 million. We expect net closures of between 20 and 30 Applebee's restaurants globally, the majority of which were expected to be domestic closures. Please note that these closures are part of our system-wide analysis to continue to improve the health of our franchises. At IHOP we expect our franchisees to continue to have development appetite with projected net openings to range between 35 and 55 new restaurants globally the majority of which are expected to be domestic openings. G&A is expected to range between approximately $165 million and $170 million including noncash stock-based compensation expense and depreciation of approximately $40 million. I would like to highlight that this range is inclusive of approximately $6 million of G&A related to the company restaurant sector. Lastly adjusted earnings per share per diluted share for 2019 is expected to be between $6. 90 and $7.20. To close 2018 was a very solid year for our brands. Looking ahead we will continue to focus on the execution of several strategies to deliver top line and bottom line growth operating value to our growth initiatives and return of capital to shareholders. So with that I will now turn the call over to John.

Thanks Tom and good morning everyone. We are certainly very pleased with Applebee's momentum as Q4 represented our fifth quarter of positive comp sales growth. Applebee's plus 3.5% performance on top of our prior year's plus 1.3% performance resulted in a healthy plus 4.8% two-year comp sales increase for Q4. And once again according to Black Box Applebee's has outperformed every category of the restaurant industry on comp sales including QSR casual family dining casual dining upscale casual and fine dining. From my perspective this is yet another indicator that the Applebee's business model is stable predictable and very capable of lapping prior year's successes. Most notably 2018 was a milestone year for Applebee's as our plus 5% full year comp sales increased representing the best annual performance Applebee's has posted in 25 years. This result can be attributed to our truly exceptional franchise partners and our very talented and committed Applebee's team. Together we reestablished Applebee's as a vibrant and innovative brand with clear strategic vision and a commitment to sustain growth. Without question Neighborhood remains the center piece of our success. This brand position is both differentiating and relevant as it embodies who we are and what we for Applebee's and its authenticity clearly resonates with all of our guests. Most importantly Eatin' Good drives our strategy drives our strategy around operations culinary beverage off-premise neighborhood activation and of course our advertising which we continue to believe is best-in-class in the restaurant industry. I'm also proud of our restaurant excellence as we continue to surprise with our guests with a consistently great experience. This is evident in all key operating metrics from guest satisfaction to value for the money. Our culinary strategy remains focused on abundant and indulgent value with a focus on mainstream recipes and flavors that our restaurants teams can execute at a consistently high level. Innovation here will be smart selective and fully validated as was the case with our very successful pasta and introduction in Q4. Now beverage and off-premise continue to be meaningful drivers of innovation and results. Each business segment represents the distinct occasion for us with very specific guest profiles in each states that we leverage in our messaging and our execution. While not yet fully optimized we view beverage and off-premise as incremental growth engines for the brand. And Applebee's advertising continues to connect emotionally with our guests. There is no better example of this engagement that our very relatable run around our most recent to go ahead which I hope you have had a chance to see on air over the past few weeks. Applebee's business grew at a rate of approximately 30% in 2018 substantially outperforming casual dining again according to Black Box. While remains our top off-premise priority our focus in 2019 we continue to optimize and expand both delivery and catering. Now on the portfolio front as Steve highlighted we acquired 69 restaurants franchise restaurants in North and South Carolina in mid-December. We have been for running for this company-owned operations for a while now and we are very encouraged with team's early leadership and execution. At present this geography currently outpacing the system from a comp sales perspective. In fact this is a trend we see at Applebee's as our new franchisees and new owners now rank 1 2 and 3 in year-to-date comp sales performance across the system. And after only two months of ownership we remain confident in achieving all business goals related to this portfolio and we will certainly keep you informed as we progress here. Turning to our full U.S. restaurant base as previously outlined Applebee's closures will low in 2019 as we approach and normalize closure rate of approximately 1% in 2020 and beyond. Another important sign very important sign of brand health is that ad front and royalty delinquencies which represented a significant challenge in 2017 and 2018 have essentially disappeared here in 2019. Finally we simply love our position in this market. We set a goal to become the most improved restaurant brand in America in 2018 and we absolutely delivered on that goal. Applebee's business fundamentals are now sound our restaurant execution is significantly enhanced our franchise partnership is stronger than ever and we remain confident in our ability to sustain this momentum moving forward. With that I'll turn it to Darren.

All right. Thanks John. Good morning everyone. Over the last year at IHOP we focused on executing against a broad strategy underpinned with specific measurable actions intended to generate immediate results and to fuel future growth. Serving as a road map this strategy includes four key pillars: Significantly enhancing the guest experience running great restaurants driving traffic and being where the guest is. The significant work done under each pillar has played an integral role in the success we are experiencing today and has addressed all aspects of the guest experience both in our restaurants and off-premise. I'm very pleased to report that this holistic approach has produced another outstanding quarter for the brand and our best in 2018. IHOP's comp sales for the fourth quarter solid 3% which represent fourth consecutive quarter of positive comp sales growth. Not only was this our top quarter of the year but it was our highest quarterly comp sales increase since the third quarter of 2015. This also marks the fourth consecutive quarter that IHOP outperformed the family dining category based on comp sales. On a full year basis comp sales grew 1. 5% and total revenue grew 3. 9% both of which have been the brand's best performance since 2015. This is quite an accomplishment and clearly demonstrates the strength our strategic plan and the love people have our iconic brand. I couldn't be proud of our team members and franchisees for everything they have done to achieve these results. Based on large parts of these efforts in the past year we believe there are several drivers that will contribute to sustainable positive sales. First we successfully changed the narrative regarding lunch and dinner occasions at IHOP with strongest day parts for both the fourth quarter and full year. With abundant value and variety on our menu we proved that we can attract guests any time of the day. While breakfast will always be our focus the continue to represent largely untapped white space for us to grow. Consistent with that theme our ultimate for the platform continues to help drive positive results. Burger sales remained strong in the fourth quarter and are still more than double the levels we had before the burger launch. Second we are seeing solid growth in our off-premise business which is primarily driven by traffic. For the fourth quarter comp sales increased by a strong 23% and to-go comp traffic rose by approximately 13%. Online orders represent a significant opportunity for us as the average check for online orders is approximately 31% higher than all other to-go orders. With the increasing relevance of online ordering we believe there is significant upside potential. Our online ordering system enhanced website and new mobile app have all created a complete omnichannel experience for our guests. And best of all online ordering isn't just more efficient it's more profitable. To address the of our guests we launched our initial national-wide delivery program in partnership with DoorDash last July. In just six months we've tripled the number of participating IHOP restaurants from DoorDash bringing our total to more than 1000 restaurants currently and another 300 restaurants expected to be added to the DoorDash platform by the end of the year. This year our focus will be on expanding our relationships with another leading delivery service providers as well as increasing marketing efforts aimed specifically at building awareness around our IHOP and Go program and driving new and repeat off-premise business. We believe delivery will provide even further upside to our already strong to-go business which accounts for 8% of overall sales an increase of 200 basis points from the fourth quarter last year. Another component to being where the guest is putting more IHOP restaurants where our guests won't go. I'm happy to report that we had another strong year with new restaurant development. We ended the year with a net increase of 34 IHOP restaurants domestically and another 11 internationally. This is in stark contrast with the rest of the industry and we expect this positive development trend to continue for IHOP in 2019. Turning to the third driver the remodel program which plays an important part in shaping guest perceptions for the brand. Our guests were in modern comfortable restaurants that exceeds their expectations and we gave it to them with a Rise N' Shine remodel. We are currently testing the second of the Rise N' Shine remodel which includes new guest-facing technology that enhances the overall dining experience. Such as our tool to provide more accurate wait times tablets to increase order efficiency and accuracy and wireless credit card devices to allow guests to easily pay while retaining possession of their credit card. This year we completed another 275 remodels bringing the total number of restaurants with the Rise N' Shine image to over 1000 when combined with new restaurants openings. Fourth we sharpened our focus on all aspects of the guest experience and operational improvement. We achieved the highest scores among our peer group for overall guest satisfaction and revisit intent thanks to our renewed focus on our I-hospitality service program. In fact we achieved an all-time high overall guest satisfaction score in October which indicates our guests are seeing the tangible efforts of our results. Lastly our strong brand equity with consumers enables us to leverage enticing promotions to drive guests into our restaurants. Such as our popular breakfast combo and our award winning limited time offer which universally below the entertainment property with menu items and free value offer. To close we want to be excited about IHOP. We're heading into the new year with a lot of brave momentum and our efforts around menu innovation expansion off-premise initiatives and developments that help accelerate our growth by continuing to focus on our broad-based plan and delivering against our four key pillars will continue to expand family dining. It was an incredible year for IHOP with several notable highlights including our 50th anniversary creating a media buzz with the IHOP name change campaign to launch our Ultimate Steakburgers platform and opening our 1700 domestic IHOP. I'm confident that 2019 will be yet another successful year for the brand. And with that I'll turn the call back over to Steve for his closing comments. Steve?

Thanks Darren. To recap we had a strong year and we continued to make significant progress in returning Dine Brands to a growth company. While we have done a great deal of heavy lifting to get to this point we still have a lot of work ahead of us. We have the right plans in place and we are executing on a multipronged strategy that has produced positive results. With the headwinds of 2017 behind us we are in a significantly stronger position headed into 2019. We have a lot of compelling attributes such as robust adjusted EBITDA margins and an attractive adjusted free cash flow profile due to our highly franchise model which and I'll continue to repeat our No.1 priority is return of capital to shareholders. Now we would be pleased to open up the call for questions. Operator?

And our first question comes from Michael Gallo from CLK.

Steve you have been there a year now I guess my question is John as well. Obviously there was some low-hanging fruit in getting the Applebee's system back on its feet. But I was wondering if you could speak to kind of bigger untapped opportunity that you start to think about Applebee's think about the potential analyze data or things that you haven't really done in the past? And really you kind of progressed the brand forward over the next few years. I'm not sure if there is a new remodel package or things that you look at but again if you could just speak to some of the longer-term opportunities as you kind of get to the low-hanging fruit?

Yes. So I'll direct this mostly to John but let me just head it off. Our view is we have righted the. We have moved back into a very profitable area for our franchisees. We are very excited about the traffic the growth that we have seen. We are excited about expanded opportunities both in off-premise as well as returning to growth. We are looking at starting to add new units by hopefully the end of the year. We are starting to have conversations with our franchisees as we speak. And so what we got is a robust brand which is has been around for a while but as you have seen our demographics has high 40% and climbing 34 under customers in our restaurants. So think we've got a brand with a history that people love and we've returned to its roots which is what people wanted us to do. But we have also got a strong new component to our demographics that leads to a very favorable long-term future. And we think we got a lot of opportunities to grow this brand both domestically and internationally. On the domestic side we expect to start seeing some real development. I just came back from a large franchisee investment conference out here in California and the interest in our brand was a remarkable. I got at the end of the conference to speak but three people from previous panels had already talked about Applebee's success in terms. There was really nothing left for me to say. So we are pretty excited about that opportunity. John why don't you fill in with color.

Sure. Thanks Steve. Michael I think let's call 2017 the foundational year or transitional year 2018 was the return to relevance in growth and it was critically important we demonstrate our ability to consistently and predictably generate results. We are in that position right now. And so as I look at the brand I feel we have an extraordinarily unique partnership and business model with our franchisees. We have 32 partners. They are large operators with deep experience and significant know-how in restaurant industry in particularly casual dining. And that partnership unlocks strategic opportunities. We had healthy debate back in 2017 and partially in 2018. We put a new team in place of exceptional leaders. Their partnership with franchisees works well. We meet on an every other month basis. We're now dealing as we look at 2019 with kind of a full deck. We closed our underperforming restaurants. We leveraged with some really great insight our consumer teams. So we location based markers. We take distinct occasions. We look at the -- we understand drivers and motivations and we mark it accordingly. We are very selective and disciplined in our innovation both on the culinary front and beverage front and we will continue to see that selectively from the team. Our off-premise business has three components. We are primarily focused on to-go call it 11-plus percent of our business today. It will get up to 20%-or-so over the next three years but there are two other emerging components catering and delivery whilst secondary priorities at the moment we got a footprint of about 1000 1100 restaurants activated delivery internationally or locally and catering remains very low-hanging fruit for a brand that is fundamentally in variety based brands. So we think we're positioned well. You add all that up probably most significant business opportunity and that is restaurant excellence and we are very well positioned. Our team under the leadership of Kevin Carroll and our franchisees have really made tremendous progress. The variability has narrowed our guests to experiencing probably what they did Applebee's in our heyday a terrific one hour 1.5-hour experience and to-go experience is equally satisfying. So you add all that Mike and we are well positioned in 2019 and beyond and we are candidly very excited about our future.

Our next question comes from Brian Vaccaro from Raymond James.

Couple of quick clarifications and a follow-up question. John I think you just mentioned delivery in covering 1 100 Applebee's units. I was looking through the a few minutes ago and I think I saw a little under 800. So I guess that it implies that you rolled another 300 quarter-to-date. Am I interpreting that currently?

Yes. Brian including that both national providers where we have a formal contract as well as local providers we have handful local providers as well. But yes I anticipate eventually getting up to 1500 units there from a delivery perspective.

Okay. That's great. And circling back to the improvements that you've made at Applebee's to the in-restaurant experience can you provide a little more color on where you've seen the most improvement in the last three to six months? And where you see opportunities for further improvement into 2019?

From the restaurant operations perspective Brian.

Yes.

Number one would be variability. Meaning when I stepped in 2017 the variability between our bottom performers and our top performers was large. And so that's been tightened dramatically. Our percentage of guests experiencing a problem which we quantify on a daily basis has moved dramatically south to the point where it's about 4% which is a very low defect rate if you will. And then we placed a significant premium on guest satisfaction and value for the money. And those are two and they are both very strongly correlated. Our accelerated performance is tightly correlated to overall comp sales improvements. And frankly we have very tough standards. We hold our franchisees accountable. And interestingly they want to be held accountable. And they applauded the actions that we have taken over the past two years to encourage underperforming units and underperforming operators to exit the system. And so those are a few highlights and that's where we are focused operationally. And I would also add that we are pleased with the unit economic progress in the individual restaurant profitability. Both brands have a restaurant profitability improvement initiatives underway. We captured substantial savings in 2018 anticipate doing so in 2019 and '20 probably on a perpetual basis.

All right. That's great. And then just one if I could Tom. Looking to the 10-K a little bit question. On the Applebee's franchise segment you obviously put the annual numbers in so back into the fourth quarter. Just had two questions. On the Applebee's franchise revenue I wanted to just confirm that I think it was around $49 million if my footing is right. That includes that $6 million of collection of past two royalties within that $49 million if you could confirm that. And then on the expense side it looks like it was in the mid-$4 million range on franchise expense. Can you walk through the puts and takes? I think bad debt expense was down. Just walk through the puts and takes of the that franchise expense in Q4 please?

Tom why don't you start off.

Sure. So on the Applebee's franchise segment revenue you're right. It doesn't include the collection at the end of the year. So hopefully that answers that question. With respect to expenses just again are you speaking specifically to Applebee's franchise segment so you are.

Yes. I'm speaking specifically to the Applebee's franchise segment which looks to be about $4.5 million for the quarter. And I'm just trying to kind of I know there is movements. We can follow-up off-line on it absolutely but just bad debt I think was down $3 million but we can follow-up off-line if it makes sensitive.

Yes. You have some so you have if you recall for the year you have about a little over $3 million of bad debt expenses in there. And that's the bulk of it Brian. So that gets you it's about $3.2 million actually.

Okay. And I guess if you think about 2019 the Applebee's segment profitability it seems the message is we see a normal 'normal' royalty collection rate going forward and bad debt I'm sorry the franchise expense line we should expect something a normal run rate or something a $2 million a quarter going forward so the volatility dampens going forward?

Yes. That's absolutely right. So you're going to have both brands back to the norms with respect to bad debt expense.

Our next question comes from Nick Setyan from Wedbush Securities.

The guidance obviously is phenomenal above anyone's expectation. So that begs the question. What drives that confidence into the 2% to 4% comp at both brands? And any commentary quarter-to-date would be extremely helpful to maybe at least have some kind of foundation from which we can start in terms of how to think about that comp?

Yes. So I think, if you start with the brand performance and the comp numbers, it really Darren and John it really gets to a multipronged strategy. So there are several different pieces we're employing. Obviously, one of the big ones is providing growth, which we think we'll provide growth for the next couple of years is off-premise. So we talked a lot about it. We've put a lot of investment into technology. We've got we think leading ways of delivering our product with integrity into people's homes and offices and catering another opportunities because we invested in the containers that we shipped in. So our product not only is being available electronically, it's also available you could receive it in store in any restaurant. And so I think people are recognizing that. We haven't even really scratched the surface of the catering opportunity in both brands. So we just think that's a big opportunity for us. Secondly, on the technology side, we are investing significant dollars in lots of things that are customers friction points or restaurant profitability enhancing option. So we talked about it, there are no wait options, you bring your own device options, the tablet options. First we are taking to the kitchen to simplify, but it also innovate the menu. So it is a we are in categories that are healthy. We have got leadership position of growth in 11 years run. And I think as long as we continue to lead, these numbers are possible. Now what that assumes is we got a healthy environment that we're operating in. So you don't believe in consumer confidence lasting through the year that numbers changed a little. But we're simply looking at what our trajectory is the things that we know we have in store for this year which on both brands are incredibly exciting and probably the most I have been involved in this company since 2012. It's the best plan that we have had ever from the standpoint of things that we are going to do to excite guests to give them reasons to come into the restaurants to provide a wider variety of options both healthy both sensitive to people's needs sensitive to advocacy groups as well as exciting menu options just to turn people on to come to our restaurants. So we gave a pretty wide range because we wanted their we obviously are not new to the operating environment. But right now we think we really hit the sweet spot in both brands in terms of putting things out to drive traffic exciting kind of things promotions but the food options that we're bringing to Applebee's are going to be several surprises this year that are going to be really fun. On the IHOP side we are following we follow the burger campaign with the pancheeza campaign which we took over national. And I think people are seeing that we are having fun with this. And I think it makes us an interesting set of brand. And I think people feel for these brands. There is a strong royalty on both sides. And I think we are now delivering on that but in a way that's fun it's a little edgy at times but it's always innovative and we don't take ourselves too seriously. And I think that's resonating with the 99% of the American public that we represent. In both brands we have 60 million visitors come to our restaurants every year. The more we know about them the more we tap into that the more we are able to market to them the more valuable this company becomes. But we're starting from such an incredible advantage of not only our demographics but also the size of these brands franchise business scale maps. Our job here is to grow that scale. So we improved profitability from franchises for the company and we also provide a more interesting and innovative restaurant on both the IHOP and the Applebee's side going forward. But we built the right teams they're doing the right things every time including our guests. The restaurants have never been run better. We have never had a better group of franchisees. There has never been a better working relationship. It just we're just. I have been in this business for a long time almost 40 years. And this is as good a situation as I have seen. And so our job is to make sure we continue to build on that that we accelerate the growth of these brands as well as potentially others that we accelerate international growth which is a great year we signed over 70 restaurant deals last year. So that's a great start. But we just think the opportunity is huge and we're now in a position where the foundation is in place we're putting the tools that we need we're learning more about our customers every day and we think this is fit.

You mentioned the trajectory of a bid there. Even the low end of the comp guidance implies a significant uptick in two-year trends which we have already been seeing. And so I mean there is a current trajectory at least in terms of what you have seen Q1 kind of indicate that we will continue to see this acceleration on a two-year basis?

Well last year was a remarkable year for Applebee's. I have had a great year. So you can expect that the trajectory that we are on fits into the guidance we gave.

Perfect. The other question I want to ask about is on free cash flow. It looks like the annual adjusted free cash flow exceeded the guidance that I had seen out there by about $30 million. I think we are at $151-million-plus in terms of adjusted free cash flow. First is that correct? And second how should we think about free cash flow in 2019?

So I think that it is correct, but remember that a lot of that is coming from the -- we're not making another $30 million contribution to the Applebee's that advertising front. So that's a lot of that increase. But yes, so we're returning to what will be a robust cash flow position, which as if you think about this business model, it's a cash machine right. The franchise system particularly with more scale provides incredible margins, will provide enormous amount of cash flow with the difference in EBITDA and cash flow is the same right. So we're going to continue to do that and then as I mentioned at the end of the call, our primary goal is return of capital to shareholders. So you saw this quarter, you saw what we're doing with the dividend. Now the dividend increase quite frankly, we're not going to increase 10% every year. We wanted to be -- we set our guidance is somewhere between 30% and 45% of our cash flow. That increase gets us to right above 30% of free cash flow. So we are very comfortable with dividend. Obviously we believe investing in our stock is a good investment. We will continue to see that from us. But it also brings us other opportunities to invest in the brands and look potentially for new brands to add.

I'll just add that if you really think about our business model the flow through from EBITDA to free cash flow is very very strong. Typically our CapEx figure is well south of 10% of EBITDA. And so that's in sharp contrast to other business models that are predominantly or more significantly company operated.

Just a follow-up. Were there any onetime thing in 2018 or towards the tailwind of 2018 aside from bad funds. I mean if I think about ad fund contribution that should be on top of this $150 million in 2019. Is that correct or I'm I wrong on that? And were there any kinds of anything onetime in nature in 2018 that we should think about when we're thinking about the 2019 cash flow?

Yes. So one thing just to highlight is on with respect to G&A I think on the last earnings call I had mentioned that we did have a little bit of an increase on G&A with respect to a few different items. One was and this continued in Q4 one was with respect to employee compensation. It was very specifically performance-related incentive compensation that drove the number up a little bit. But the second piece was increased litigation cost which is expected. We obviously came to a favorable resolution on a significant litigation case. And so that number went up a little bit. And then finally I had mentioned that there was reallocation of dollars as we headed into the final half of the year. And it continued in Q4 with respect to IT. Some of the development activity was reprioritized and it hence became G&A dollars. And so that's again just a function of some movement that we had in IT towards development. As the year progresses they make better decisions on how they're allocating IT dollars.

Perfect. On the unit growth at Applebee's is it still first half we should get sort of Q1 Q2 something like 20-plus closures? And then in the back half I guess that implies positive net unit growth in the second half of 2019 at Applebee's?

I wouldn't say second half. I would say that we believe that we are we will hopefully be on course to be starting to open up units towards the end of the year. So those conversations are just starting with our franchises obviously because we are focused on making sure that the brand had both a performance and a prototype that was compelling for franchisees to build. We believe we are going to do that start that this year and it will start bearing fruit towards the end of the year. And I think the way to think about it probably you will see a lot more signings than you will actually see openings. But it will be a combination because one of the things we are going to encourage franchisees to do given that we got a lot of struggling brands in this category is conversions are very attractive for to grow as well and a number of franchisees are already doing looking at options for that. So we just think that we think that performance of the brand combined with the opportunity for potentially restaurant space that is at a least level that's very affordable for our conversion opportunity and quite frankly new builds as well. But we think there will be a combination of those opportunities in our franchisees and we are bringing that dialogue as well as very strong demand for folks that are not franchisees that want to buy into this system and build new restaurants with us.

Got it. And then last question. It would be really helpful if you gave us some numbers around the franchisee profitability at Applebee's. I know I'm sure that's a question you guys often get but any kind of reminder on where the franchisee profitability at Applebee's is would be very helpful?

Yes. So we obviously monitor that closely and we're very focused on their profitability. But I think the way to think about it is at an average unit volume of about 2.5 the profitability can vary obviously from where they are operating labor cost and all this. The interesting thing though is we believe and our franchisees are proving that we are actually even in the phase of fairly steep labor cost increases we are seeing in most cases margin improvement and that's because of the changes our franchisees are making in their office model as well as a lot of work that we are doing with them in the kitchen. We're actually expecting our product cost to decline slightly this year which will be a real boost for us. We've talked before about we have done an internal study and now made it permanent in terms of looking at ways to reduce cost and improve operations both in the kitchen and front of the house that are bearing fruit. We think that could be worth over the next several years up to 300 basis points and potential profitability improvement. And we're going to need that to offset labor costs at this point as the markets obviously are tight. As we talk about here we do represent 99%. So it's a 2-edge sword for us. Those people going back to work are our customers. So there is benefit as well as cost in the higher labor pressure and that obviously is exacerbated in some market versus some others. But we think in general where they are now is getting close to where they were in 2016 which is it can range on an average unit volume as I mentioned 2.5 you're in the double-digits and it can range into the high-teens depending on how intense the revenues are.

And that's after royalties after that some contribution?

Yes yes.

Our next question comes from Stephen Anderson from Maxim Group.

Just a couple of follow-up questions. First in your EPS guidance what can you quantify the impact from the ownership of the 69 locations. That is all I have?

John.

Yes. So if you think about it we expect this so we gave obviously consolidated adjusted EBITDA guidance that and when you take the component the contribution of the company restaurants which is about $10 million for the year it flows through to be slightly accretive but we're talking about relatively modest numbers Steven.

Well I think the real answer is we are just getting to the restaurants. We obviously did some due diligence before we made the acquisition. But we think there is significant upside to them and we are in the process of so pulling all of that together optimizing the structure. We are very happy with the performance today on the revenue side. We think there is upside of revenues. We think the cost picture will obviously shake out over the next 30 to 60 days. We will share more about it in the first quarter call. But it's immediately accretive and we think that will grow.

And my final question is in terms of concept on this call but I just want to see if you with that and if you have discussed with any of the franchisees?

I'm sorry can you repeat that?

Third restaurant concept.

I have said now within the next 18 months at some point they will be ready. So we are looking for something very specific okay. We are not looking for major acquisition you're not going to see a big purchase by us. We are looking for a tuck-in acquisition call it sub-$100 million. So think about what that means. That means restaurant a concept with 40 to 80 units. That's a regional concept for the most part that we can grow nationally and there are several key components to that. One is it's got to be immediately accretive equity. So we're not going this. Two it has a come with a management team that is self-contained because we are not going to distract from our major brands bringing a new brand. So we needed a founder and the team that's coming in and that wants to grow their concept nationally with us. What we provide is franchising expertise capital and obviously franchisees. So the other part of that picture is we are only going to look at brand our franchises want to build. So we got built-in audience. Franchise business that scale. The more we can add to the scale the better off will be the better our margins will be the better our franchisees margin will be because our returns will be better. So we are looking for a very specific set of circumstances. We to afford at this point but I can tell you we're looking at lots of things and but when we announce something it will fit those criteria or we will not announce.

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

Just one more just quick clarification. On the acquired units you clearly mentioned $9 million to $11 million in the press release. The question is that burdened with the $6 million of G&A. so that's sort of a true clear EBITDA number or is that before the G&A allocation?

That is burden.

We would like to say enhanced revenue growth value add.

I will now turn the call back over to Steve Joyce CEO for closing comments.

Okay. Well thanks again for your time today. We are scheduled to report results for the first quarter on May 1 and we look forward to speaking with you there. Have a great day.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.