Dine Brands Global Inc (DIN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2012 DineEquity earnings conference call. My name is Larry, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator instructions). I would now like to turn the conference over to your hosts for today, Julia Stewart, Chairman and CEO; Tom Emrey, Chief Financial Officer; and Ken Diptee, Investor Director of Investor Relations. Please proceed.

Good morning and thank you for participating on DineEquity's first quarter 2012 investor conference call. Today, I'm joined by Julia Stewart, Chairman and CEO; and Tom Emrey, CFO.

Before I turn the call over to Julia and Tom, let me remind you of our Safe Harbor regarding forward-looking information. Today management may discuss information that is forward-looking and involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different than those expressed or implied by such statements. We caution you to evaluate such forward-looking statements in the context of these factors, which are detailed in today's press release, as well as in our most recent 10-Q filings with the Securities and Exchange Commission. The forward-looking statements made today are made as of the date euros and assumes no obligation to update or supplement any forward-looking statements. Additionally, on the call we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are described in our press release today and are also available on DineEquity's investor relations website.

With that, I'll turn the call over to Julia Stewart, Chairman and CEO. Julia?

Thanks, Ken, and good morning, everyone. Welcome to our first quarter 2012 earnings call. We'd like to use this opportunity to provide additional commentary on the news release we issued this morning regarding our results. Then we'll open the call for your questions.

Let me begin by saying we are pleased with our first-quarter performance. Importantly, our business fundamentals remained strong. We continued to deliver on our strategy to generate significant free cash flow and reduce debt.

I'm also delighted that we made additional progress on refranchising Applebee's company-operated restaurants. We've entered into an asset purchase agreement without financial contingencies for the sale of 39 restaurants in Virginia. With the completion of this transaction, we will have 98 restaurants remaining to sell since we will keep 23 restaurants in Kansas City as an R&D test market. The net proceeds will be used for further debt reduction. Consistent with our historical practice, we will issue new guidance when this deal closes, likely sometime in the third quarter.

Now I will review our operating performance for the quarter, beginning with Applebee's. We achieved domestic same restaurant sales growth of 1.2% in the first quarter compared to strong growth of 3.9% in the first quarter of 2011. This means we achieved sales growth of 5.1% over the last two years. Same restaurant sales experienced a lift in part from the mild winter weather and from our ongoing remodel program. However, we recognize the need for more traffic driving innovation across products, service platforms and promotions at Applebee's.

To that end, I'm challenging the organization to speed up innovation even more than we have already done so. And remember, we have upgraded or replaced over 90% of the menu over the last four years.

That process is well underway and I want to call attention to some new product introductions which occurred in the quarter, including a number of dishes from our unbelievably great tasting and under 550 calories menu that resonated strongly with our guests. In February, we refreshed our signature Two for 20 menu with the launch of Jazzed up Flavors of Bourbon Street. This promotion continued through the end of the first quarter and featured two new items, blackened chicken penne and Bourbon Street chicken and shrimp, which was an extension of our popular sibling entree platform. Applebee's has built a significant and compelling value proposition for our guests with two for 20.

And as we've said previously, the Applebee's remodel program is another significant part of our strategy to reinvigorate the brand. In the first quarter, our franchisees continued the rapid pace with an additional 87 restaurants remodeled. When combined with new openings and previous remodels, 671 Applebee's restaurants or 36% of the domestic system have the new look. We expect more than 50% of the domestic system to have this exciting new physical appearance by the end of this year.

Our franchisees are enthusiastic about the remodel and see the benefit of the program. On average, remodeled restaurants continue to experience a mid-single digit percentage increase in sales pre-posts net of control.

Next, I'd like to review Applebee's gift card sales and redemptions, which continue to serve as a catalyst for growth. After achieving $300 million in system sales in 2011, an increase of 6% over 2010, we experienced solid redemptions throughout the first quarter. The gift card business continues to be an important part of our overall marketing strategy. And on the development front, Applebee's franchisees opened six new restaurants in the first quarter, of which five were international. And while pleased with the overall two-year comp sales trends, we are keenly focused on driving sustainable traffic growth. We have established a strong innovation track record at Applebee's but we need to do even more to strengthen our leadership position. To do that, we must drive value, which, of course, remains top of mind with our guests.

It's important to reiterate that value doesn't just mean price. So we remain committed to driving traffic through innovation and every aspect of our business from menu, marketing and technology innovation, which we believe will propel us forward.

Now let's turn to IHOP. Our journey to re-energize the brand continues and we clearly have additional work ahead of us. While first-quarter domestic system-wide sales restaurants declined slightly at 0.5%, there were some positive results driven by the plan for success initiative to improve IHOP's restaurant operations and increase traffic and sales. Nothing is more important for us than getting IHOP back where it needs to be, innovating and growing.

On operations, in the first quarter, we launched our revamped service excellence program, which is our in-restaurant service model to enhance the guest experience -- think speed and attentiveness. Early results from the service excellence program show that our guests are seeing a positive change. The restaurants that have implemented the program are consistently achieving higher guest satisfaction scores in guest loyalty, intent to return, likely to recommend and overall satisfaction.

We ultimately expect this to translate into higher sales. To that end, we continually work closely with our franchisees to analyze their guest loyalty index scores to ensure that franchisees address the areas that their loyal guests share with them. On value, to drive sales and further enhance our value platform, we launched IHOP's first nationally promoted value offering in the first quarter with our Seven for $7 menu, which features seven great entrees for $7 every day. We gained some very valuable insight here that we will have significant long-term benefit. So stay tuned as we drive value that is relevant to IHOP's consumers.

On the menu, we are implementing the first phase of our new menu strategy which is in restaurants today to simplify and optimize the menu by focusing on key items that our guests know it for. As I mentioned in previous investor calls, we have restructured our menu strategy around four culinary platforms -- core equity, which includes items like our famous pancakes and coffee; branded signature items, such as stuffed French toast, which help to differentiate IHOP; enhanced value items, such as our seven for $7 offering, which provides every day value; and health and wellness, which includes items like our spinach, mushroom and tomato omelette. We have some more work to do here, but there is encouraging progress.

On advertising, and other aspect of our plan to drive sales is the development of new advertising to leverage our iconic brand heritage and play to our strengths. We intend for this new advertising to help us redefine the American breakfast experience. Look for this new ad campaign in the second quarter.

IHOP has increased its resources to understand the interests of our guests and accelerate the culinary pipeline with new and exciting offerings. Additionally, our efforts in digital marketing and social media will allow IHOP to reach a broad spectrum of guests and better meet their changing needs and expectations.

Regarding development, IHOP's franchisees opened 10 new restaurants in the first quarter, nine of which were domestic. And lastly, IHOP celebrated another successful national pancake day, its annual free pancake fundraiser. IHOP raised more than $3 million in donations for Children's America Miracle Network hospitals and other local charities, beating its 2011 fundraising total by more than 20%. We've now raised more than $10 million for Children's Miracle Network hospitals and other local charities. We are thrilled with the generosity demonstrated by both our franchisees and guests, who help us give back to the communities in which we operate and enrich the lives of children in need.

We have some very interesting innovation at both brands aimed at ensuring each achieves its full promise. And while the initiatives we just discussed show some real potential, more needs to be done to unite them in a cohesive everyday guest experience, and I'm personally working on that with the brands and the culinary team. All in all, I do believe both brands are on the right track, but we have real work to do and I'm proud of our team. They're very much responding to the challenge.

With that I'd like to turn the call over to our CFO, Tom Emrey, for a discussion of our financial results. Tom?

Thanks, Julia. I would like to review a few points of the press release we issued this morning. Free cash flow resulting in debt reduction and lower interest costs are the main themes.

In the first quarter of 2012 we reduced our total debt by $86 million. Bank debt was reduced by $69 million, bond debt by $5 million and combined financing and capital lease obligations by $12 million. A leverage ratio at the end of the first quarter was 5.2X. Our ability to steadily generate significant free cash flow has enabled us to substantially reduce our debt by approximately $795 million since the Applebee's acquisition in 2007.

Interest expense was reduced by $6 million in the first quarter of 2012 from a year ago, primarily as a result of our debt reduction strategy as well as the repricing of our senior secured credit facility in February of 2011. The strength of our highly franchised business model allows us to generate strong and stable free cash flow with reduced volatility. It's worth noting that we generated free cash flow in excess of $100 million in each of the last three fiscal years. For the first quarter of 2012 we generated free cash flow of $44 million. Now, not that the first quarter will generate a disproportionate share of non-refranchising-related free cash flow due to timing primarily attributable to gift cards and the interest payment on our bonds, which occurs semiannually in the second and fourth quarters of our fiscal year.

Regarding income for the first quarter, adjusted net income available to common stockholders was $25 million or $1.36 per diluted share compared to $26 million or $1.42 per diluted share a year ago. The year-over-year decrease of $1 million was primarily due to a higher income tax rate and lower segment profit, driven by the execution of our strategy to refranchise Applebee's company-operated restaurants, partially offset by lower cash interest expense.

Our Franchise segment gross profit is up approximately 5% over 2011 with the franchise margins improving to 74.5% for the first quarter of 2012 from 73.8% a year ago. The improvement is primarily driven by the additional restaurants from the refranchising of Applebee's company-operated restaurants and new restaurant development by franchisees year-over-year.

The effective tax rate for the first quarter of 2012 was 36.1% compared to 27.9% in the first quarter of last year. The prior-year effective tax rate was lower due to the release of liabilities for gift card-related tax benefit as a result of the issuance of first-quarter 2011 guidance by the Internal Revenue Service. And on G&A, G&A expenses were $40 million for the first quarter of 2012 compared to $38 million in last year's first quarter. Most of this year-over-year increase was attribute able to higher stock-based compensation and severance charges.

During the quarter, we refranchised Applebee's company-operated restaurants in the mid-south area at a pre-tax of approximately $17 million. This gain is not reflected in our adjusted EPS, but it is in our GAAP EPS.

Lastly, I'd like to review company-operated restaurant margins, which were strong in the quarter. For the first quarter of 2012, Applebee's company-operated restaurant margins for the 160 restaurants was 17.8% compared to 15.3% in the first quarter of last year. The increase was primarily driven by the refranchising of lower margin restaurants, higher sales, lower hourly labor expense and reduction and depreciation. These items were partially offset by commodities inflation. It's important to reiterate that as refranchising progresses, company margins become less relevant. In fact, when we sell the balance of our Applebee's company-operated restaurants, we will longer separately report on the remaining 33 DineEquity R&D restaurants.

With that, I will now turn the call back to Julia.

Thanks, Tom. As we discussed earlier, we entered into an asset purchase agreement for the sale of 39 Applebee's company-operated restaurants in Virginia, taking another significant step towards our strategic goal of being a predominantly franchise system. We expect the transaction to close during the third quarter. And just to reiterate, as we've done in the past, we will update our guidance after the transaction closes.

To summarize, we had a solid first quarter and we continue to leverage our strong and stable free cash flow to significantly reduce our debt. We made additional refranchising progress with the completed sale of 17 Applebee's restaurants in the mid-south region. We continue to work closely with our brands to create new and innovative menu items and improve operational performance, and we remain focused on helping our franchisees increase their profitability.

And one last comment -- I'm sure you saw yesterday's news release announcing our new 10-year exclusive deal with Pepsi to supply beverages to both IHOP and Applebee's. This strategy is core to DineEquity and represents a real win for our franchisees and, just as with our purchasing co-op, shows our commitment to drive real value for them. Our success depends on our franchisees' success.

I'd like to close by saying that we delivered against our strategic objectives in the fourth quarter. We continue to generate strong free cash flow, reduce our debt and refranchise Applebee's company-operated restaurants. We continue to rejuvenate Applebee's and differentiate the brand. And at IHOP, we're executing on our strategy to drive sales by improving operations, innovating the menu and delivering a stronger value proposition to our guests. Looking forward, we've got work to do and we are doing it. I want to be clear that I'm optimistic about our long-term plan to continue to drive shareholder value through strong cash flow. Now Tom and I would be pleased to answer your questions. Operator?

(Operator instructions) Will Slabaugh, Stevens.

Thanks and congrats on the quarter. IHOP -- just curious there on how you think of your value message here and how you think it's resonating, both in general and then as it relates to your new seven for $7 menu.

I think this notion of communicating value to consumer is really important to us. But clearly, we have to find that right niche. And part of what we have been working on is what resonates and how do we make certain that it comes through in a way that works for consumers both during the week, weekend -- what can we find that sort of sweet spot? And as I said in the prepared remarks, we've learned so much from the seven for $7, and I think that will help us throughout the balance of the year as you see us do more in this value messaging. It's really hitting the sweet spot for us at IHOP, and that's what we are very focused on.

Okay, and that as far as the messaging, I'm just wondering if you had any more color on the new marketing strategy and how you think that's working so far. Specifically just talking about the menu inserts, handouts, or your historical LTO strategy there.

I think the short answer is, we are a work in progress and you should ask me more about that on the next call because I'll have a lot more data. We just put all that through in real-time. But at least the preliminary feedback that we've gotten on some of the Consumer Insights works that we've done is that people like it. It resonates with them, it's easy to read, easy to get to. So we've had a lot of sort of like general comments like -- I really like this, this makes it easy for me. A lot of people not even looking at the menu, looking at the answer. If you've been to an IHOP recently, it is very well done inside, so a lot of positive feedback. But in terms of what it's done to mix and what it has done to profitability and the overall, I'll have more of that knowledge base on the next investor call.

Great, thank you.

Carla Casella, JPMorgan.

My question relates to the different dayparts. Can you just talk about whether you are seeing more competition for either of the changes at -- during the different dayparts?

No, I think it's about the same as it has always been. Clearly, when you think about IHOP, we are not just competing in family dining, we are also competing in the overall breakfast category. That's been going on for a while now. But I don't see -- nothing stands out as a particularly strong strength or weakness in any of the dayparts. We have an opportunity, and that's the focus that we have been working on, especially at Applebee's on the individual strategies. I think I've mentioned for the last two or three calls this focus on lunch with radio, dinner with TV, late night with social media, very focused on the different dayparts.

Okay, great. And then on the -- I guess I was just wondering what you are seeing in terms of the consumer strength or weakness. When you see consumer weakness, is a certain day part that gets affected more than another, and if you're seeing any improvement in the overall consumer trend?

Yes. I think I said before, I don't notice any real blips up or down, and I think I said before I think the real opportunity is us. I think we have an opportunity to better differentiate both brands, and that's the focus. I don't see any really -- I know there's people who will tell you there's direct corollaries and the like. I think we view our consumer as there for the taking and just very focused on differentiating both the brands.

Okay, great, thank you.

Reza Vahabzadeh, Barclays.

Reza Vahabzadeh; Congrats on the numbers. As far as leverage, would you anticipate, Julia and Tom, that you could get into that four times leverage neighborhood by the beginning of next fiscal year? Would you target lower leverage next fiscal year as well?

Yes; I think -- here's the way to think about it. We've said for the foreseeable future we're just paying down debt. So if you think about our free cash flow projections, paying down debt, hopefully trying to sell as many company restaurants as possible, at that rate you will end up with a 4 on your leverage at some point in 2013.

Reza Vahabzadeh; Got it. And then was weather a factor either way for your same-store sales in the first quarter?

I think the way to look at it is itsy-bitsy spider. It has probably a teeny, teeny, teeny impact on both brands, but not enough to wave a flag and talk about. And to be very candid with you, it's not an exact science. I could have the team spending weeks on it. Intuitively, I think Tom and I would tell you -- feel free to jump in here -- that there probably was a slight positive impact but not enough to --

Yes, there is, and from a management standpoint, it's really not actionable, so we don't spend a lot of time with it.

Right, but -- it wasn't a huge number, I guess, is the better way to say it.

Reza Vahabzadeh; Got it. And then on the franchisee margins, as you've highlighted, you got good operating leverage there in this quarter. Is that something that one should broadly expect to occur over the balance of the year and going forward, just getting that higher operating leverage on franchisee revenues?

No, I don't know that I would say that. I think the first quarter tends to be a little bit front loaded in terms of the margins. And I think we stand by the guidance that we issued and we are just going to watch it like you do.

Reza Vahabzadeh; Okay, got it, thank you.

Peter Saleh, Telsey Advisory Group.

Great, thanks. I just wanted to ask about the menu mix and what you are seeing across your system, both lunch and dinner. Are you seeing more alcohol sales, more desserts, more appetizers, or is that kind of holding steady?

So at the end of last year at the last investor call, we talked about the fact that at Applebee's, for the year we had averaged 14% in alcohol mix, which was a record high for us at Applebee's. That's the highest it's been. And we are sort of tracking along like that, which is really good news. I think it is twofold. I think that is the work that the chain has done a great job of getting food service to suggest itself at dinner, and I also think that's the work we're doing at late night on the individual programs. So part of our increase has to do with late night, part of our increase has to do with upselling at dinner. So that's sort of continued. I haven't seen any really big change in that.

And I think we always said that we had upside in opportunity. When we first bought the brand, the mix was about 12%. So we've made some huge inroads there. That is absolutely -- and of course, it needs more profitability for the franchisees, the liquor mix. So that's good news.

In terms of other items in the brands, I think we've had the steady improvement, which we feel good about, on under $5.50 and fabulous, Weight Watchers. Those have been really nice. The healthy wellness items at IHOP we've seen some steady increases. So I think this notion of whether we are health-conscious or have caloric sort of focused, that's been a nice positive uptick in mix. Two for $20 is staying about the same. It goes up ever so slightly when we go on television. But, in terms of dramatic shift, not really. We've seen some nice, steady progression, I would say, since the last couple of years.

And then on the remodel side, I'm sorry if I missed this at the beginning of the call. But where do we stand on remodels? How many are done, how many are planned to be done for the rest of this year and then any returns that you're seeing there?

Let Tom speak to the returns pre/post net of control. In terms of what has been done thus far, it's 671, or about 37% of the system. We will be just about 50% of the system by the end of this year. I think we've always said that we will be pretty much all done by early part of 2014, which is really good news since the franchisees contractually have to do it in six years. But they have been so excited about the remodel, so supportive of it, they will get done probably closer to four. And you want to talk about --

The lift has been -- will continue to be what we've seen so far, which is mid-single digit pre/post net of control.

Great, thank you very much.

(Operator instructions) Michael Gallo, CL King.

Good morning, congratulations again on the good results. I just wanted to delve in a little bit on seven for $7. Can you talk a little bit about where that's mixing, how consumers are using the menu, and whether think it's the right platform, whether you think it's additive, whether you think it cannibalizes any of the core items, or just a little more on how the consumers using that? Thank you.

Yes, the seven for $7 right now is getting about 5% of the mix, and that has been pretty consistent since we went on the air. I think in terms of the long-term, what's the right message, that's the work that I told you we are spending some more time in Consumer Insights, and by the July call I should have a lot more data on -- we're fairly new into that.

The really, really good news is that the franchisees -- and remember, we have a lot of them at IHOP -- are very supportive and aligned on this notion of creating the right value message. And that I'm thrilled about because it means that we've got a system that is supportive of trying to figure what's exactly right message. There's no question that this -- doing this handout, if you have been in an IHOP recently, I encourage you to do so. If you see that handout, that is really resonating with everyone.

So I think this notion of mixing new items with a value message all in the insert works for IHOP. It sort of attracts all the different folks that we are getting into IHOP. That's, I think, our sweet spot. The actual dollar number and what's the right mix -- that's what we're working on as we speak. But I really feel very comfortable in saying we will have a lot more data on that come the next call. It's a great question.

Great. The other question I have is on Applebee's side. I was wondering if you saw any regional differences in comps, in terms of California versus Northeast versus some of the other areas.

We always have slight differences, but nothing extreme. You might see a point here or half a point there, but nothing worth talking about in a meaningful way.

Great, thank you.

Brian Vaccaro, Raymond James.

Good morning, guys, just one quick one for me. On the G&A, you mentioned that there's some severance in there. Can you specify how much that was in the quarter?

Well, it was in the hundreds of thousands of dollars. I don't want to get into the specifics of it, but this wasn't a huge number.

They way you should think about it is, as you know, we reiterated on the press guidance for the year. So a lot of this is timing, so we were just calling it out for you. But we've reiterated guidance for the year in G&A, so that's probably the better way to think about it.

Okay, thanks.

With no further questions, I would like to turn the call back over to Julia Stewart for closing remarks.

Well, thanks, all, for joining us this morning. Our second-quarter reporting date is July 31. If you have any questions, please feel free to call Ken, Tom or myself. We are here for you, and we thank you for your time.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.