Dine Brands Global Inc (DIN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one DineEquity, Inc. earnings conference call. My name is Matthew and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Mr. Ken Diptee, Executive Director Investor Relations. Please proceed, sir.

Good morning and thank you for participating on DineEquity's first-quarter 2013 conference call. Today I am 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 involves known and unknown risks, [certainties] and other factors which may cause the actual results to substantially -- be substantially different than those expressed or implied with such statements. We caution you to evaluate such forward-looking information in the context of these factors which are detailed in today's press release, as well as in our most recent filing -- 10-Q filing with the Securities and Exchange Commission.

The forward-looking statements made today are made as of the date hereof and we assume no obligation to update or supplement any such statements. Additionally, we may refer to certain non-GAAP financial measures which are described in our press release and are available on DineEquity's Investor Relations website. With that I'll turned the call over to Julia Stewart, Chairman and CEO.

Thanks, Ken, and good morning, everyone, and thank you for joining us on DineEquity's first-quarter 2013 earnings call. This quarter marks the start of our first fiscal year since completing the Applebee's re-franchising program in October, 2012. After ending last year on a strong note we started 2013 by delivering solid results.

Additionally, we announced our capital allocation strategy which returned significant free cash flow to our shareholders through the combination of a meaningful first-quarter dividend, $0.75 per share of common stock, and a $100 million share repurchase authorization. We also completed the repricing of our senior secured debt and modified the debt covenants to lower our interest costs and provide increased flexibility.

Our proactive G&A restructuring last year resulted in a 14% reduction compared to the first quarter of 2012. And our highly franchised business model generated a 34% increase in free cash flow. We paid out over $14 million in cash dividends in the first quarter and we are working hard to drive consistent and sustainable same restaurant sales and traffic at both of our brands.

Looking forward we will continue to manage our capital structure with a long-term view and maintain a strong balance sheet while emphasizing the importance of positioning the Company to potentially refinance our overall debt in the next few years.

Now the first quarter was uneven as others in the industry have noted and, while we don't normally discuss the economy, the industry was clearly faced with macroeconomic headwinds which contributed to viability and variability in the quarter. The environment definitely impacted the consumer and had some effect on domestic system wide same restaurant sales at both brands. The duration of the residual effects is difficult to gauge and consumer confidence remains mix.

I would now like to provide a brief review of the first quarter and then I will let Tom discuss the financial details. I will start with IHOP. As I've shared with you before, I'm confident in our strategy, our executive team and especially our franchisees. We will continue to execute on our plan in order to achieve consistent and sustainable same restaurant sales and traffic growth.

As a reminder, the four key pillars of our plan to drive improved performance are -- differentiating our menu; providing better value; strengthening our advertising and media; and consistently achieving operations excellence, all of which are designed to make our franchisees more profitable. The changes necessary to achieve each of these are gradual but we are making progress.

Remember that as a 99% franchised company fluctuations in same restaurant sales have less impact on our bottom-line. However, we are very focused on improving franchisees sales and profitability for the long-term health of our business.

IHOP's domestic system wide same restaurant sales mark an improvement from the last three sequential quarters, down slightly by 0.5%. Even though we outperformed the family dining category overall in the first quarter this is not acceptable, and I will continue to challenge the team and franchisees to reach our goal. Frankly, we are driving changes rapidly as we can effectively execute at this time.

On advertising and marketing, in the first quarter we continued to refine our strategy as demonstrated by the innovative TV spots in support of our successful promotion, All-You-Can-Eat Pancakes, as well as the recent commercial filmed in Times Square for our new line of breakfast sandwiches, Griddle Melts, which are superior in quality and taste.

Recognizing that we previously did not have a line of breakfast sandwiches to compete in this category, we conducted comprehensive research before introducing Griddle Melts. In fact, this new offering is a great example of us being relevant to our guests. In addition, it reflects the next level of creative innovation.

Our breakfast sandwiches, in my humble opinion, are simply the best in the industry. I encourage all of you on the call today to visit an IHOP and see for yourself.

IHOP's menu is key to our success, and so we introduced in January the first of three new menus planned for this year. The second launch is scheduled for June 1 and the third is slated for late 2013. Our strategy is to simplify the ordering process by improving the overall layout while celebrating our food with improved mouthwatering photography; significantly reduce the number of menu items offered over time that lessen complexity; and most importantly, introduce new and exciting menu offerings and categories.

We are in the early stages of the execution on our new menu strategy, but we are confident in our plan. And to accelerate our menu innovation we brought on a new Head of Menu Development and Innovation who has extensive background in the casual dining space. We are very excited about the influence that she will have in the development of a pipeline of products that only IHOP can deliver, further strengthening our iconic brand position in family dining.

Regarding innovation and value, late last month IHOP announced the introduction of its latest breakfast innovation, Brioche French Toast. This next generation of French toast comes in three delicious and distinctively new flavors, which I am sure our guests will enjoy. The item is just one of the many new signature dishes and categories IHOP will launch in 2013.

On IHOP's gift card sales, the gift card program remains an important part of our marketing strategy and we are seeing continued interest. For the first quarter IHOP's gift card sales increased by 17% from a year ago. And as I've said before, we are paying attention to every part of this business.

With that let's shift to Applebee's results for the first quarter regarding same restaurant sales. Domestic system wide same restaurant sales were down 1.3% in the first quarter. Sales were impacted by a decrease in traffic due in part to the bumpy environment I mentioned earlier. And while it is clear that the casual dining space faced headwinds, we will not allow macro conditions to dictate our results.

We are working to restore Applebee's same restaurant sales and traffic momentum by differentiating the brand through innovative and creative advertising, testing new technology platforms and providing a broad array of craveable menu items that will entice repeat visits.

On value in the menu, value is a competitive factor in this space and we continue to see an aggressive emphasis among the competition. We are working to address this across each day part and provide a signature Applebee's dining experience you just simply can't get anywhere else.

In February we refreshed our popular 2 for $20 value offering with the inclusion of two new dishes inspired by New Orleans style cuisine, 2 for $20 continued to perform well. Refining our menu is an important part of the dining experience for our guests. Additionally, we are testing new health and wellness options that are nutritionally responsible without sacrificing taste.

On the remodel program, Applebee's franchisees remodeled 40 restaurants in the first quarter. At the end of the quarter 54% of the domestic system had the new revitalized look and we project that approximately 70% of the system will have the updated look by the end of this year.

Regarding Applebee's gift card sales, sales increased 15% compared to the first quarter of 2012 with gift cards reflecting the strong affinity guests have for the brand.

To close, we are optimistic about the hard work on the IHOP menu coming to fruition. And while we have not yet achieved our goals, the team and I and the franchisees are committed to making the changes necessary to get the business back on track.

And at Applebee's we have a proven strategy in place and we are building on it. We are streamlining the core menu and focusing on innovative ways to drive consistent sales and traffic growth.

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

Thanks, Julia, and good morning, everyone. I would like to review some more highlights from the press release we issued today. For the first quarter of 2013 adjusted net income available to common stockholders was $21.8 million or $1.14 per diluted share, this compares to $24.6 million or $1.36 per diluted share in 2012.

The year-over-year decrease was mainly due to the expected decline in segment profit as a result of re-franchising. This decline was partially offset by lower G&A and lower cash interest expense as we continue to focus on controlling costs.

I'd like to highlight that the first quarter has historically been our most profitable partially because gift card redemptions are generally the highest during the period following the holiday season. Our franchise segment profit was up $2.9 million in the first quarter of 2013 over the prior year, mainly driven by the increase in franchise restaurants due to Applebee's re-franchising and restaurant development predominately by IHOP franchisees.

G&A expenses were $34 million for the first quarter of 2013 compared to $39.6 million in 2012. The decrease was mainly due to lower personnel costs as a result of re-franchising and our comprehensive restructuring initiative announced in July of 2012. Our plan is tracking to deliver the savings we had anticipated.

Regarding cash flow, our highly franchised business model continued to generate strong free cash flow in the first quarter. Free cash flow increased by 34% to $59 million compared to the first quarter of 2012 due to a favorable change in net working capital mainly resulting from the timing of prepaid rents, an increase in gift card cash collections because of higher gift card sales, and a decline in cash interest payments due to lower debt balances. Please note that the increase in cash from operations was partially offset by the cash dividend paid in the first quarter of 2013.

To recap, the cash balance of $117 million at the end of the first quarter was high in part because of pending interest and estimated tax payments, the swing in net working capital mentioned before and seasonally high sales.

Regarding the tax rate for the first quarter of 2013, the effective tax rate just for the first quarter was 39.6% compared to 36.1% in the first quarter of 2012. Approximately 2 percentage points of this increase was due to lower income tax credits, primarily FICA, tip and other compensation-related tax credits as a result of re-franchising. The remaining 1.5 percentage points of the increase was primarily due to first-quarter adjustments to our reserve as a result of recent audits with taxing jurisdictions. We still expect the full-year rate to be approximately 38%.

Interest expense declined by approximately $5 million or 16% in the first quarter compared to the same period in 2012 primarily due to the reduction of debt balances over the past 12 months. Our consolidated leverage ratio at the end of the first quarter was 4.7 times, up slightly from 4.6 times at the end of the fourth quarter 2012.

And please remember that the current leverage ratio is based on trailing 12 months of EBITDA and the leverage ratio moves with EBITDA. The full computation again is defined in our publicly filed credit agreement.

To close, we are delivering on our stated objectives to reduce G&A, generate strong and stable free cash flow and manage our capital structure to position the Company for long-term success and create value for our shareholders. And now I will turn the call back to you, Julia.

Thanks, Tom. We will continually enhance the appeal of our brands and remain responsive to the needs of our guests and I'm confident in our long-term strategy. As stated in our press release this morning, please note that we are reiterating our financial performance guidance for fiscal 2013 which we shared on February 27, 2013.

And lastly, we are focused on creating value for our shareholders as evidenced by the first-quarter cash dividend payment of $0.75 per share of common stock and the $100 million share repurchase authorization. We will concentrate on the levers that we can control to drive sustainable, long-term shareholder value. With that Tom and I would be pleased to answer your questions. Operator?

(Operator Instructions). Michael Kelter, Goldman Sachs.

First question I guess, Julia, when you talked about the macroeconomic backdrop, which of course impacted everyone, you said the duration of the residual effects of the slowdown was difficult to gauge. I guess I was surprised by that comment since most restaurant companies talked about a quick snap back to solid growth in March/April. So I guess my question is, did you not see that same dynamic?

Well, I -- I don't comment on intra-quarter so we don't talk about April. But for the first quarter it was definitely lumpy and bumpy. And so, I think there were weeks where it was incredibly positive and weeks where it was negative.

And so, my comment is it is hard to predict what the balance of the year holds and I think it is sort of a mix in the environment. Again I, don't want to put a lot of weight in that because I think our job is to differentiate our brands, but clearly we saw a lumpy and bumpy first quarter.

And then on G&A, I just wanted to get a little help there. You mentioned that it was partly -- that that line item partly benefited from lower incentive compensation. What was the year-on-year delta on incentive compensation? And do you expect that to continue through the year or was that just likely a first-quarter phenomenon?

We are going to have to track that down here, we will get that back to you before the end of the call.

The actual number.

The actual numbers.

Yes.

Yes, I am just trying to get a better idea of what the underlying G&A run rate is given how much the P&L has changed in the last year or so.

Yes. And as I said, you really have to go to the guidance we gave because we are reiterating guidance for the year on G&A along with every other line item. So if you look at guidance from February 27, that is the number we are going with for G&A for the year.

all right. And then lastly, IHOP showed some improvement and, that said, you acknowledged that it did decline again. At this point after your nine straight quarters of same store tales and traffic declines, are you starting to see ramifications with the franchise community?

So, I'm not sure about the first part of your comment about decline. We announced that for the first quarter sales were a 0.5 negative.

Right.

And that is better than it has been the last several quarters.

I guess my comment is it has been negative for each of the last nine quarters.

Right.

And I am curious if you are starting to see any sort of ramifications with the franchisees at this point?

No. I think the reality is -- I have mentioned this on several occasions -- that our bad debt is one half of 1%. I mean we just don't see that because I think they have enough cushion. But I would tell you that there is a tremendous amount of pressure and emphasis being put on by both franchisees and management to do everything that we can.

Frankly I think one of the best things that has happened is the purchasing co-op which enables them to have a significant savings in the good cost line and in the distribution line. So that has really been a saving grace. I didn't share this, but the commodity inflation forecast for 2013 for IHOP is positive point 8/10. So that is actually a good thing.

Thank you very much.

John Ivankoe, JPMorgan.

First, I did want to follow up on the cash balance. I think, Tom, you pointed out what a lot of us thought, that it looked optically high at the end of the first quarter. So can you put that cash balance, your generation of cash in the context of your share repurchase that I think has already been announced? Should we expect that you put free cash flow to share repurchase second, third and fourth quarter? How should -- where should we go from here?

Like we said when we announced the program at the end of our earnings call last time, we are going to be opportunistic about our share repurchases and the size of the cash balance at any given point in time is not necessarily indicative of what our plans are.

Okay. And could you remind us I mean like what is a base level of cash for your business? Like for example on average throughout a fiscal year? What do you need to run your business successfully especially given the fact that you do have a revolver?

Yes, we haven't really provided that number. I'm not really prepared to do that right now either.

Okay, I will move on to its separate topic. I think your system wide sales -- I mean all stores year over year were down slightly year over year in the first quarter of 2013 versus 2012. Obviously comp is one component of that, the other component is unit growth.

I mean are you beginning to see any appetite domestically international for increased unit growth? And maybe referencing the previous question, I mean do you see -- are we at risk of stores closing or eclipsing your net unit growth 2013 and 2014?

So, I think the best way you should think about it, go back to guidance, which was Applebee's was 40 to 50 restaurants for the year, right, the large majority in the US, IHOP was 50 to 60, majority in the US. That is pretty much similar on the IHOP side, that is substantially increasing on the Applebee's side. So the short answer is there is continued interest, both brands.

And certainly with the large majority of Applebee's being remodeled I think you can honestly say there is more interest now in developing with a large majority of the system remodeling. And albeit not aggressive growth on the international side I think we will start to see more interest. And we do have more multi-unit development agreements in place internationally now.

So I think we are vetting that international strategy as we speak and you will see more of that in the coming year. It is safe to say though with a 4,900 square-foot building it is not like we are going to build 1,000 in China, it just doesn't work that way. But I do think we can increase the rate internationally at some point.

Okay, and one more final question for me and this is kind of an add-on to Mike's question. Your press release said lower stock-based compensation. And I wonder if that is -- I mean, you are just planning to issue fewer restricted shares or fewer options year over year that might even be different than incentive compensation? I mean was that a first-quarter event? Was there something unusual in timing with that?

No, there is nothing particularly unusual about it. I mean there are fewer executive employees as a result of re-franchising and restructuring -- that is a piece of it. It is not big variance.

Normally that number goes up especially with a higher stock price. But that's not necessarily the case in 2013?

Not necessarily, no.

Okay. All right, thank you. That is it for me.

Bryan Elliott.

First -- just actually a couple follow-ups. So first on the cash question. So if I think about your business as it exists today, near-term cash needs would be obviously to meet the headquarters payroll and the G&A payroll piece of G&A and build up the six-month recurring interest payments and that is about it, correct?

Well, there is taxes.

And taxes, okay.

Among other things.

Yes, forgot about them. That is true. Okay.

Wish I could do that.

Sorry?

I said I wish I could do that (multiple speakers).

Yes, anyway -- I won't in a public forum go further than that (laughter). And my next question would be thinking about the -- just the industry dynamics and Applebee's position as the largest casual dining chain. So basically you held your marketshare in Q1 despite the difficult and choppy environment.

The impression will be at left, Julia, from your earlier answer that you didn't snap back as much as the industry did and therefore Applebee's has entered a period of marketshare losses. Could you address that interpretation of your previous answer, please?

Yes, I think the first part of your comment/question is correct, we held our own in marketshare. And if you look at the outside resources that track, we certainly beat the rest of the large competition in casual dining for first quarter. That is just not good enough, obviously, right, to be less negative than everybody else is not good enough. And so, holding our share on market share is absolutely correct. But we want to do better than that, we've been in the positive comp territory for a long time.

So, we are going to be left hanging, debating whether Applebee's has slipped relative to the industry in March and April which saw a solid comeback?

Yes, I think the way you should think about it is it's first quarter, we guided for the year a negative 1.5 to a positive 1.5, we have not changed guidance and the environment is lumpy and bumpy. I think it is just a fair comment.

Okay, thank you.

Bryan Hunt, Wells Fargo Securities.

Julia, I was wondering if you could just comment on perhaps how the intensity of promotions in both family and casual dining may have changed throughout the quarter. And what do you think of the current environment in terms of promotional intensity?

Yes, I am not big on intra-quarter, I am big on directionally. And directionally I would say if you think about the last couple of years there has been a fair amount of promotion. I think there is more today than there has been. We do a tracking internally and if you look at -- it doesn't really matter whether it is fast food, fast casual, casual, family -- everyone is doing a fair amount of promoting.

And as I have always said, one of the things I'm most pleased with on the Applebee's and IHOP side is that we have value engineered these products we put on television. So we make money, our franchisees make money, it is just not simply discounting from the existing menu. Many of our competitors are still doing that, discounting on existing menu items.

So I do believe that our strategy is having a positive effect financially. Someone asked that question earlier about our franchise community. But I think the environment is aggressive in terms of value and I think it is going to be that way for a while.

Additionally, when we look at the casual dining industry there are definitely some of your competitors that are spending ample time on re-models. I was wondering if you could talk about your own systems remodels. Are they continuing to see the lifts that they had in the past year in terms of returns on the remodel CapEx?

Yes, nothing has dramatically changed on the remodel. As you know, contractually Applebee's franchisees have six years to remodel; the large majority of the system will do it in four. I think the reason for that is not only do they believe in the remodel, but it is providing that low-single-digit ROI.

Okay, that is it for me. I appreciate it, thank you.

Will Slabaugh, Stephens.

I wanted to ask first on IHOP just in general how the new menu items you have put in place already are mixing? I know you launched oatmeal whole wheat pancakes, et cetera, some other new menu items, so how those are trending. And then any more color you would be willing to give on the second menu launch in June and what we should look for as far as how you will be judging yourself there?

So all of the new items, whether it is the oatmeal or some of the parfaits or the sandwich Griddle Melts -- the Brioche French Toast and the Griddle Melts go on the June 1 menu, so they go from TV now onto the June 1 menu. So there is a little bit of TBD, but I think the thing we are most looking for in the June rollout is in general what happens to penny profit for franchisees and what happens to mix because that menu is a very different design than we have historically had.

And in the test we got a ton of positive feedback both from franchisees, food servers and guests that it became easier to find the menu item, it didn't take nearly as long to navigate the menu. And people really were able to find things that they just never had seen before. In particular the greatest feedback we got in the testing was didn't know you had appetizers. Now we've had appetizers for 40 years, but suddenly they can find them on the menu.

So I think we are looking for a mix shift, we are looking at penny profits which we don't typically ever disclose. But this is all about our franchisees making certain they make more money and that we get this navigation improvement which frankly and directly should help us on speed of service.

So we will be looking at speed of service, quality marks, how people feel about how long it takes to get their item, penny profit -- lots of different ways we will look at that menu. But a lot of belief certainly from the test results that it will be incredibly well received.

And on the menu, do you know off the top of your head what the number of menu items will be on the newer menu versus the old?

At IHOP?

Yes.

You are still around 175 on the menu. You won't see that dramatic reduction until the late 2013 menu. It's a very difficult process to get 365 franchisees to agree what you are going to take off the menu. But I have confidence and faith in both our franchise leadership council and our marketing team that we can begin to reduce those items.

And just a quick follow-up to the G&A question from earlier and the impressive drop year over year this quarter. I know you guys have given that guidance for this year. I just wondered if you had any sort of directional idea of how we should think about modeling next year's G&A. I know we are kind of early here, but modest growth there or further reductions -- just in general how to think about that?

Yes, I think the best way to think about it is there were a lot of timing issues in the first quarter, which is what we tried to say, but our guidance is still the same for 2013 for G&A. Don't get too excited about first quarter. And when you think about thereafter, I would tell you today we have done a pretty darn good job of maximizing G&A. So today I would tell you I don't see any large dramatic reduction.

I think what you see is what you get. But good management should always be looking at G&A. So we will always have one eye on is there opportunistically anything there, but I think pretty much what you see is what you get from a G&A steady-state basis. In terms of guiding for 2014, we will certainly do that next year. But I don't think you are going to see some sort of major reduction, I think we've pretty much done everything we can do.

Thank you very much.

Jeff Farmer, Wells Fargo.

At Applebee's it looks like you were pointing to differentiated advertising, I think you said new technology, craveable menu items, just some of the planned traffic drivers for the balance of the year. Can you just give us a little bit of color there, some of the key items that you think have some of the best opportunity to move the needle for you guys?

Sure. I think most people know we spend a fair amount of the national advertising dollars at Applebee's on ESPN and I think we have an opportunity there to stretch the envelope and do some pretty humorous and inviting ESPN advertising which we have been very focused on if you have seen that.

And then I think on a day-to-day basis, whether it is lunch or dinner or tagging it for late night, it is how we can differentiate ourselves. I mean everyone wants great food photography but it is what else we do to begin to really differentiate the brand. And that is the work that the team there has been really trying to solidify, how we can break out through the clutter. And that is a real focus for us as we speak for the balance of the year.

The promotional calendar is set, but it is what can we do on an advertising front. So there is a tremendous effort there to sort of enhance whatever we have and break through the clutter.

On the technology, I have been woe to say too much because we are in some alpha and beta testing. But you should think about the kind of technology that would help either from a consumer facing perspective or from things that we can do to enhance our ability to deliver to the consumer. But more of it is really consumer facing kinds of technology that we are looking at that would differentiate it.

Okay, that's helpful. And then just one quick accounting question. And I missed this; I was reading through the last transcript, it wasn't clear on this call -- at least to me -- D&A. So not G&A but D&A. What is the full year 2013 D&A targeted at right now?

We don't guide on that.

Okay. I thought last quarter it was sort of embedded into some G&A guidance, I must have misread that. So no D&A guidance? Can you at least let us know if you think the number we saw in the first quarter, the 8 --?

The number that we guided -- to clarify, the number that is in there --

That we released in February?

Yes. Consolidated general and administrative expenses were expected to decrease between [140 -- to 144, 147] including non-cash stock-based comp expense and depreciation of approximately $19 million through the comprehensive G&A administration reduction -- cost reduction initiative. Is that the number you are talking about?

Yes, so I am still confused what that means.

It is non-cash in G&A.

So non-cash D&A in G&A, okay. Bryan Elliott knows more about this than I do. He should probably ask the question --.

It's a non-cash piece of the G&A.

Okay. But just one last question then. So the D&A number was almost $9 million in the first quarter. Is that a representative run rate as we move throughout the balance of the year -- considering all of the asset sales or the franchising of the Company-owned restaurants?

Yes, we think so.

Okay, all right, thank you.

Thank you, ladies and gentlemen, for your questions. I would now like to turn the call over to Julia Stewart for the closing remarks.

Thank you, Operator, and thank you all for being here. So, two comments. One, I want to correct something I said -- I guess I was speaking fast. When someone asked the question about the remodels at Applebee's, I said a low-single-digit ROI; I meant to say a low-single-digit lift off of sales. So I apologize if I misspoke.

And then to wrap up, thank you again for participating this morning, really appreciate it. And our second-quarter 2013 reporting day is July 30, 2013. And as always, if any of you have any additional questions, please still free to call Ken, Tom or myself. Thanks for your time this morning.

Thank you for joining today's conference, ladies and gentlemen; this concludes the presentation. You may now disconnect. Have a good day.