Hello and welcome to the Q3 2019 Dine Brands Global Earnings Conference Call. My name is Sheryl, 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 [Operator Instructions]. Please note that this conference call is being recorded. I would now like to turn the call over to Ken Diptee, sir you may begin.

Good morning, and welcome to Dine Brands’ third quarter conference call. I’m joined by Steve Joyce, CEO; Tom Song, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee’s. Before I turn the call to Steve, please remember our Safe Harbor regarding Forward-Looking Information. During the call, management may discuss information that is forward-looking, involves known and unknown risk, uncertainties and other factors, which may cause the actual results to be different from 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 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 Dine Brands IR website. With that, I will turn the call over to Steve.

Thank you Ken. Good morning everyone and thank you for joining for today’s call. I’m pleased to report that we have achieved several business and strategic objectives during a challenging quarter for the industry. IHOP’s comp sales were slightly positive in the third quarter, while Applebee's performed in-line with the revised expectations that we communicated last quarter. Both brand cycled over strong promotions in the third quarter of 2018. Notably IHOP launched our ultimate steakburgers platform last year with the single tweak to imply that we were changing the brands name to IHUB and this went viral worldwide. At Applebee's, we brought back our popular All You Can Eat Riblet and Chicken Tender and introduce our new three course meal, which contributed to the brand's highest quarterly comparative sales increase in over two decades. As others have noted, the industry continue to face difficult comparisons coupled with challenging traffic trends during the quarter this year. Both Jay and John will provide details on the performance of their respective brands a little later. We are pleased we have announced the largest multi unit development deal in IHOP's history. We have plans to develop nearly 100 IHOP restaurants with TravelCenters of America, headquartered in Westlake Ohio, which conducts businesses in 43 States and Canada. Jay will provide further details on this exciting new partnership. Turning to our financial results adjusted EPS improved compared to the same quarter of 2018. We also continue to see improvement in consolidate adjusted EBITDA, which reflects the stability of our asset light model. Another compelling attribute of our business model is the ability to generate substantial adjusted free cash flow. In the first nine-months of 2019, we generated approximately $100 million in free cash flow. G&A, which is an important lever for us declined approximately 4% compared…

Thank you, Steve. Good morning everyone. While we have difficult comparisons for last year, I’m very pleased to report that we delivered year-over-year improvements and adjusted EPS and adjusted EBITDA. For the third quarter of 2019, adjusted EPS was $1.55 compared to $1.53 for the same quarter of 2018. The increase in adjusted EPS was due to relative earnings stability and the result of our commitment to return capital to shareholders through share repurchases. I will provide more color on capital allocation a little later. Turning to our franchise operations, gross profit declined 2.5% primarily due to a decrease in Applebee’s franchise revenues due to fewer effective franchise restaurants, which include the impact of our acquisition of 59 units, resulting in franchise royalty being replace with Company operated sales. Additionally, a decrease in domestic franchise restaurant top sales and the decrease in revenue recognized upon cash collection which did not recur this year also contributed to the decline in the franchise revenue. This decrease was partially offset by growth IHOP franchisees. In fact, when looking at Q3 revenue mix excluding the advertising fees and Company operated sales, IHOP revenues now constitute 68% of Dine’s profit generating revenues. At this time, I will like to provide some insight into the franchisee financial in doing so, I would also emphasize the data that I’m citing, does not represent the financial data for Dine. It is primarily based on our comprehensive surveys and data submissions from franchisees, which have not been subjected to independent reputation. For Applebee’s we have been tracking both Four-Wall and franchisee entity level financial performance. Let’s start with Four-Wall. When looking at our trends from 2017 to 2018 not surprisingly we saw improvement in margins, which was significantly driven by the 5% increase in comps. While cost of goods…

Thanks, Tom and good morning everyone. In-line with our expectations Applebee's posted a 1.6%. comp sales decline, in Q3 as we lapped our record settings 7.7% increase from last year. The highest comp sales results reported by any restaurant brand in Q3 of 2018. After significantly outperforming the casual dining category on comp sales last year, our 2019 year-to-date performance is identical to the category average through Q3. With that said, we are expecting a challenging Q4 given our very positive 2017 and 2018 Q4 comparisons for context our Q4 two years hurdle of plus 4.8% is the highest we've seen since early 2012. These expectations are now reflected in the full-year Applebee's guidance that Tom just outlined for you. Now moving forward, there are three important milestones I would like to highlights for the Applebee's brand. First 2019 marks the completion of our three-years strategic initiative that close approximately 200 underperforming low volume restaurants, with a current base of 1667 us restaurants 2020 will bring a normalized closure rates of less than 1% of the space while we return to selected - development towards the end of 2020 and certainly into 2021. Additionally, we've completed eight franchisee transactions over the past two years, representing about 170 restaurants. This portfolio evolution has resulted in the exit of several underperforming operators, while introducing new and deeply experienced franchisees to the Applebee’s system as well as creating growth opportunities for several existing franchisees. Perhaps most importantly for the first time in three years, we have no material royalty or advertising delinquencies, as of the close of Q3. This is a significant development, one that ensures a far more stable and predictable income stream, as well as a fully funded 4.25% marketing plan are coming up here in 2020. These very tangible milestones…

Thank you, John. Good morning, everyone. IHOP delivered slightly positive comp sales for the third quarter of 2019 marking the brand seventh consecutive quarter of positive sales growth. I'm very pleased with this achievement as we are rolling over the very successful launch of Ultimate Steakburgers platform in 2018. The third quarter represents our longest sustained positive sales performance in three years. And as a direct reflection of the work we've done against our strategy to defend and grow our brand. As stated on prior calls, IHOP has an aggressive growth plan that will continue to build upon for the foreseeable future. Our four strategic initiatives continue to serve as our roadmap each playing a critical role in defending and growing the brand. As a reminder, these are running great restaurants, driving traffic, being where the guest is and reinventing the guest experience. While each strategic initiatives and important IHOP's success, two of the four of the most critical priorities given the category’s traffic trends and labor challenges that are facing franchisees. Now let me provide some color on the two foundational priorities to drive profitable growth. The first is running great restaurants. This encompasses defending our core business. A sharpen focus on operations helps us keep our current guests, drive frequency and attract new guests. At the end of the day, best-in-class operations comes down to having great talent in our restaurants. Best-in-class manager training is essential, which is why you rolled out a new certified leader program this year. Through this program we will certify more than 2,000 managers by the end of next year. Equally important is simplifying the core menu and our recipes to greatly improve execution in both the front and the back of the house, while also enhancing the experience for our guests, every…

Thanks, Jay. To recap, we continue to deliver year-over-year improvement in adjusted EPS and adjusted EBITDA in a challenging environment. Our asset light business model generated significant growth and free cash flow during the first nine-months of 2019 compared to the same period last year. This enabled us to return over $125 million to our shareholders through quarterly cash dividend and share repurchases year-to-date. Both brands remain well positioned to gain share as we execute against multi prong strategies, which are underpinned by strong value propositions. I couldn't be more confident in the long-term plans we have in place to deliver value to our shareholders. Now, we will be pleased to open up the call for any questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Nick Setyan from Wedbush. Your line is now open.

Thank you and thank you for all the color around the franchisee profitability. I guess probably the number one question on everyone's mind is, how we stabilize the comp and improve the comp trend from October and I guess what are some of the learnings from this year that you can apply to next year to ensure a stable comp in 2020 at Applebee's?

Hey Nick this is John. I referenced a bit of this on our last call. When we met with our franchisees recently in the past few months, we zero in on value, value perceptions and very specifically aggressive value tactics, engineered to be profitable. But those that would drive that value seeker to incremental traffic and sales. We are aligned on that moving forward, as I also mentioned, we kind of pruned up the system. So our underperforming restaurants are out. Our Ad fund this whole, our bad debt is essentially non-existent. And you may see in the market and a current example of that, kind of tactical approach, it's a short-term - but our 25% wing programs would be one example of the program we aligned upon a few months ago with our franchisees.

I think on the higher side of the business to answer that question, we really as we stated, we want to fill our seats where we have opportunistically areas lunch, dinner, overnight. We are very strong in breakfast, we want to continue that. We will keep working on breakfast innovation and bringing great new family fun items in our pipeline. And we've got to work on value and I think value especially to help us fill seats during off-peak period.

Was advertising spend at Applebee's up year-over-year, because when I kind of do a 3.5% IHOP and I back into the advertising spend at Applebee's it seems like year-over-year it may have been down. And then, what is the expectation in Q4? And then what is the expectation on ad spend in 2020 relative to 2019?

Nick, it’s John again. Q4 is favorable versus year ago. And our kind of back half is a little more favorable than the front half. And so I mentioned to get to a more predictable run rate and operating model here by virtue of the absence of bad debt, the commitment of 4.25% moving forward, you'll see a very balanced quarter-to-quarter flow of dollars and TRPs in 2020.

Hey Nick, this is Tom, just a couple of details as well. You mentioned the ad fund comparison, while at Applebee's you did have a 425 ad fund rate both last year and this year for Q3, what I want to remind everyone is that in 2018, you had some prior quarter collections for Q3 and Q4 that boosted up both franchise revenues as well as ad fund collections. And so, yes, that was a little bit offset, you had fewer effective restaurants open. So a couple of puts and takes there.

Got it. And then just lastly, what's the plan with the company on stores going forward? And also, when you add back the D&A, what was the four-wall EBITDA margin in Q3 versus the operating margin that you guys disclosed?

Let's start with the expected longevity of the ownership. As we said when we bought it, our view was we didn't want to wait and allow those restaurants to continue to rate any further than they had. So we stepped in and quickly bought them and now have moved them up towards the top end of the performance of the system. So our view is obviously we're not a long-term owner of restaurants. And so as we feel that we've begun to stabilize, and those restaurants are in the right position, we will begin looking for an exit strategy. But the exit strategy would fit with our ongoing reformation of the franchise system. And that is we would want to bring in hopefully high performing new franchisees that are interested in growing with us.

So Nick, if you look at our guidance with respect to margins, so what we said was that the EBITDA contribution would be approximately $10 million for the entirety of the year, the full year. Then G&A was running approximately $6 million above restaurants. And so that kind of implies a profitability -- a four-wall profitability that's pretty consistent with the system. And if you kind of think of last year being very tail end of the year, so we're literally talking about December was when the portfolio was acquired by Dine. I think we've been all pleasantly surprised by how quickly we were able to stabilize, team has done great job of stabilizing the portfolio. And so our guidance remains unchanged on that front.

Our next question comes from Brian Vaccaro from Raymond James. Your line is now open.

I want to start out with Applebee's and the third quarter comps. And it seems to be a few data points for various sources floating around. And I thought it might be helpful if you could set the record straight on what the system saw from a comp cadence perspective through the quarter? And then as it relates -- sticking with the content, as it relates to your updated comp guidance for Applebee's, these are pretty wide ranges one quarter to go. Would you be willing to tighten that range on your fourth quarter comp and any assumptions that are embedded within that guidance?

Hey, Brian this is John. Let's start with your question on Q3. I'm going to resist providing any kind of sequential movement within the quarter. It's fairly balanced rolling over as you know some unprecedented performance in prior year and our guidance remains as is, it's a zero minus one. You can model that based upon three quarters of data and I don't -- wouldn't anticipate narrowing that guidance at all here as we move forward.

Okay, and I guess can you remind us as we move through fourth quarter and the monthly cadence last year, I think you talked about tapping the brakes if you will on the marketing spend in December. Do view your comparisons as getting easier, are they similar as they move to the fourth quarter?

And Brian, as I mentioned with mix question, we sit in a favourable year-over-year Q4 position from a TRP kind of a media delivery perspective. It’s balanced within the quarter, but it is favourable versus year ago, whereas perhaps our prior quarters were not. So I like our position, we like our tactical flow of activity that we have planned. And with that said, rolling over two years of a very favourable positive performance for Q4 in '17 as well as Q4 in '18, and again, that's reflected in our guidance.

Okay. Thinking about the tactical shift at Applebee's towards value. Can you give us a sense of how Pasta & Grill Combos performed versus your expectation? And also on the $0.25 boneless wing promotion, did you test that in certain markets or in the past and can you give us any sense of how that impacted and really resonated with that value seeking guests you've been seeking to reengage?

Sure. I'll start with Pasta & Grill Combos. I resist providing too much color on any tactical event. Other than to say that event delivered an abundant value which is kind of front and center for the brand, and we're pleased with that outcome. The $0.25 wing proposition was tested, it was tested approximately two months ago and very much delivered on that value seeker guest segment that I’ve referenced in the past, Brian. So we have meaningful insights in data, albeit based upon a small sample size and tests and we apply that here as we speak.

And Tom circling back to the question on the Applebee's company units, our math would suggest that the profitability flattened out this quarter. Was there something one-time in that, maybe that was seasonality and that was expected but any color on that?

Yes, that's a great question. You will see that in the MD&A commentary of our Q. I'll give some further color though which is in talking to the leadership team. There were some non-recurring items in Q3 that will have improved profitability in Q4.

Okay. In the end MD&A section, does it have the details of that or would you...

Brian, it just cites the segment profit contribution.

And then last one from me. And I do appreciate the franchisee profitability question. You talked about four-wall margins being down. Just want to make sure I heard it correctly. Four-wall margins down 100 basis points year-on-year in the first half of the year. But the four-wall EBITDA margins are still in the low-double-digits. Did I hear that correctly?

That is correct.

Okay. And you called out a 100 bps roughly -- you talked about 100 basis points being related to the delivery cost associated with the delivery build. With this renegotiated agreement, do the franchisees get back half of that, more than half of that, any color on that?

They get a lot more than half back. So it puts them back in a position of almost equivalent profitability whether it's carryout in restaurant or delivery.

Our next question comes from Jeffrey Bernstein from Barclays.

A couple of questions. One, just on the unit growth side of things, seemingly you reduced openings or perhaps noted more closures at both brands with one quarter remaining. I'm just wondering if you think there's any underlying long-term concern, whether it’s franchise engagement or interest in accelerating growth going forward? I think on the Applebee's side you said maybe late ‘20 or into ‘21 we might see that growth. But the fact that both brands were taken down, just wondering whether there's any short-term hesitation in terms of net unit growth?

Let me start and then I'll let to contribute. So on the IHOP side, as we've mentioned, based on this field and based on some other things that you'll hear in the future, we are very bullish on IHOP's growth and believe that it's going to accelerate in the future. On the Applebee's side, we believe we're going to start returning to growth with units in '20 and that we'll have moderate growth going past that into '21. And so the real question is, on the development side, we are currently in discussions with franchisees about start -- restarting the development process and with the groups they have in place. But we're also going to use the opportunity to bring in new franchisees with new territorials.

Good example of that is, we're seeing some growth opportunities not only with -- so we’ve spoken of international being predominantly IHOP, there are some international franchisee interest in Applebee's as well. And if I look at the closure rate, just to nail that down, we don't see anything out of line here. So if I look at Q1, Q2, Q3 and again, this is on some of the details of our financials. There's no real change here. This has been pretty consistent.

The only thing to add is some of those decreases are Dine international.

Okay. And then just following up on an earlier question. You talked about how at least at Applebee's it’s going to be a tough fourth quarter from a comp perspective. The fact that you have I guess 100 basis points range in terms of your full year comp guidance would imply you got 400 basis points potential swing in the fourth quarter, which again to the earlier question seems rather wide considering the relative feasibility that you see on a two and three-year basis. I'm just wondering, if you would offer any color in terms of what October brings or whether you're tracking on the higher or lower end of that very wide range?

Jeff, no color on October. But keep in mind, we're a month in. And so the reason you see the range that we provided is we have two months remaining. And so, we’re being prudent.

Okay. And then lastly Steve you mentioned being proud of the growth in both EBITDA and EPS for ‘19 as we look to ‘20 and I know you’re not giving any formal guidance yet. But any directional thoughts on whether it’s EPS or EBITDA growth. I know your long-term guidance was for high single-digit EBITDA and high teens EPS. Just wondering whether that’s around what’s possibility for 2020 or maybe some color on some of the sensitivity of the comps …?

I don’t want to talk about actual performance in 2020 but we have not come off our long-term view of this comp.

Okay. And that’s inclusive of sort of 2% to 3% comp longer-term, seems still viable at both brands?

Yes.

Our next question comes from Brett Levy from MKM Partners. Your line is now open.

I guess if we could start off just a little bit on where are you seeing these new franchisees coming from? What’s been the general makeup of people that are looking to get into the system?

Brad, I’ll speak first regarding Applebee’s. We see meaningful demand for the Applebee’s brand externally. And we’re very specific, we’re looking for deeply experienced operators in the restaurant industry, could come from multiple categories, well capitalized. And we’re not looking necessarily for purely financially-oriented entities. And we’ve stated that we will evolve the portfolio seven or eight transactions over the past few years. And you can expect additional transactions as we move forward and those are very high caliber, highly qualified prospective franchisees that allow us to be very selective as we enter in transactions moving forward.

It’s interesting. We have -- it’s a combination of backgrounds of the new franchisees coming back in. They’re all obviously in the restaurant business, but we’ve had some that are interested, they are coming from the QSR background, some coming from fast casual and some coming from casual dining.

On the IHOP side, a lot of the franchisees -- potential franchisees we’ve spoken to, especially think about a concept like ours that is a family dining, a lot of breakfast et cetera. A lot of those potential franchisees they talk about they’re rounding out the portfolio. They don’t have a family dining concept and one of the things they look to do is not compete against themselves.

Final point I will make on the Applebee’s side is as we transact moving forward depending on the geographies, we would have expect that some of those transactions comes with development opportunities as well.

If we could turn to delivery and off-premise for a second. You obviously had a lot of success and you’ve been producing outsized returns. But we’re hearing of -- we’re obviously hearing a lot more on the competitive front that more companies are going after it and with just with the law of large numbers at some point we’re going to see slowing rates of growth. How are you thinking about that both from a competitive but also from how you can get to that next level, how you can get from the nine and low double-digits to the mid or the high teen rates of mix? Thank you.

Brett on the Applebee’s side we’ve accomplished one of our accomplished one of our objectives as Steve referenced by passing along those third-party delivery fees to -- we did that at both brands to the guests. And so we want our franchisees to be margin-whole, if you will, whether that is a dining experience, to go experience or a delivery experience. And then we let the guests decide. We have a very clear demographic profile of our off-premise users. They tend to be very heavy Applebee's guests. They use dine-in as well as off-premise. We make it easy for them. We've enhanced packaging and certainly enhanced our operating experience. We're getting better at accuracy and delivering that food on time. And so this is not a fully optimized segment of the business. It is highly incremental. And we love our position.

And I think from the IHOP standpoint, the way we look at it is that first of all you got to be in the game. You don't want to concede off-premise to all the competitors that are doing it. So we're in the game. We're doing really well. We're growing the business. We're still at very high growth rates, about 25%. We think there's still more opportunities. We're only a 1,400 plus restaurants that are doing it. We still got more restaurants we can add on. We have more delivery service providers within the restaurants we already have that you can expand service providers because some guests use one instead of the other, they use DoorDash but not UberEats. So if you get more providers, you can actually expand your ability to capture more guests. We just rolled our catering to expand that business. So those all have kind of a run of time that where we think we can get great growth in next few years. You're right, at some point there's going to be a point where, okay, maybe there's not a lot more growth within the industry. We don't think we're anywhere near that right now. And then we're just going to have to execute everybody and it becomes a share war some point at the end, but we're far from the end.

But in response to your question about what's going to take us to the next level, for both brands, we see catering as the major opportunity because we think that space has been underserved and that both our brands can relate very well to catering operations. So we are prepared as we always did, the packaging and everything else we needed. We're going to target both residential catering for families and family get-togethers and social occasions. But we're also going to go after business catering as well, because we believe in a lot of cases, our product would be more desired than some of the other ones that own that business today. And we just need to get out and have the franchisees be able to execute well on the catering front.

And I guess, if I could sneak in one more. As you’ve lowered the outlook for the fourth quarter, how much of what you're seeing do you think is internal, whether misstepped or just not achieving as high rate of usage on your menu and your offerings versus what you're seeing externally across the competitive landscape? And then I'll throw it back to the queue.

Brett, this is John, I had acknowledged this, I think I acknowledged it in the past, I don’t know, on our Q2 call. Some of this is self-inflicted with Applebee’s, I would use [indiscernible] again, as a good example where we have a product that is exceptionally well received by our guests. Our failure to launch that product with a trial incentive or a starting at price point from the data, we see led to a misstep. We didn’t secure the value seekers. Trust me when I say we've applied that learning to our tactical plans moving forward. So as we normalized here and we reduced bad debt, and we've closed our restaurants, honestly for the first time in three years I feel like I don't have a hand tied behind my back. And the brand is poised for predictable stable growth and we won't have those missteps with respect to value as we kind of look forward in 2020.

I mean on the IHOP side I fully expect that we will outperform the industry. So there are headwinds for the industry. Clearly there's traffic challenges across the industry. And I think there's a cycle that takes place here where there's minimum wage pressure on franchisees to take price et cetera, and not just in our business and you look across the entire industry, there's margin pressures. People overcome margin pressures by taking price. You take so much price, you run off traffic. There's a cycle that goes on here. And we think through having the right offerings and the right products and the right experience that we will be able to overcome that and perform better than the industry. So we're confident in our plan and confident in the direction we're going right now.

But in both conferences, just we showed the franchisees the cost of taking pricing in excess, of where the consumer expects the price increase to go. And so -- and we could definitely show a correlation between those who are more moderate in price and our ability to hold traffic and perform better. And so on both brands, that was a major part of the discussion, because some of the performance issues that are internal are based on taking price. I would also say, though, that in general it's a pretty tough competitive operating environment. And in both cases, our expectation is we're going to outrun the competition in Jay's case, they are, John's case, they're kind of at it. And so -- but our stated goal is we want to lead the industry.

Our final question comes from Brian Vaccaro from Raymond James. Your line is now open.

Yes, just had a quick follow up. On the IHOP side the upcoming guidance would seem to suggest a pretty nice acceleration in comps versus what you just reported in the third quarter. That's despite lapping more difficult comparisons. Could you help us understand what's driving that acceleration, whether that’d be a successful product launch, is it day part specific. Any color you can provide?

Well, I don't want to get into how the quarter breaks down and those exact trends et cetera. So, if you just look at our guidance, I mean all we really changed was we tightened it a little, we lowered the high end down. But if you -- we were we were 1:1 at the year-to-date number, our guidance is 1 to 2. So we're still -- I think we're comfortable with where our guidance is and where we're going to end up. But I don't think there's just huge acceleration implied in any of that.

But we have -- but having said that, and not to get into numbers, but we believe we've got strong programs in place for the remainder of the year. And we'll just have to see how well they perform, keeping in mind that the Grinch was a very successful program for us last year.

That completes our question-and-answer session. At this time, I would like to turn the call back to Steve Joyce for closing comments.

Okay, thank you again for your time. We'll look forward to speaking with you again on our fourth quarter call and the progress we've made. Have a good day.

Thank you, ladies and gentlemen, this concludes our conference call for today. Thank you for your participation. You may now disconnect.