Dine Brands Global Inc (DIN) 2015 Q3 法說會逐字稿

Welcome to the third-quarter 2015 DineEquity, Inc. earnings conference call. My name is Cynthia, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I would now like to turn the call over to Ken Diptee, Executive Director of Investor Relations. Mr. Diptee, you may begin.

Good morning. Welcome to DineEquity's third-quarter 2015 conference call. I am joined by Julia Stewart, Chairman and CEO; Tom Emrey, CFO; and Gregg Kalvin, Corporate Controller.

Before I turn the call over to Julia and Tom, please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward looking, involves known and unknown risks, uncertainties and other factors which may cause the actual results to be substantially different than those expressed or implied. We caution you to evaluate such 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 or supplement these statements. We may also refer to certain non-GAAP financial measures, which are described in our press release and also available on DineEquity's website.

With that, I now turn the call over to Julia Stewart. Julia?

Thanks, Ken, and good morning everyone. Overall we are pleased with our third-quarter results, which were marked by several notable achievements. We posted 25% growth in adjusted earnings per diluted share, generated substantial free cash flow, and posted positive comp sales at IHOP for the 10th consecutive quarter, making it a leader in the family dining segment and among the restaurant industry.

We also recently announced an increase in our quarterly cash dividend to $0.92 per common share, reflecting 23% growth since the third quarter of 2014. We continue to have one of the highest, if not the highest, dividend yield in the restaurant space.

Additionally, we have significantly increased the share repurchase authorization for our common stock to $150 million from the remaining previous authorization of approximately $48 million as of the end of the third quarter. Since 2013, we have repurchased over $111 million of our common stock and paid approximately $150 million in cash dividends. These decisions reaffirm our commitment to return the majority of our free cash flow to shareholders and that doing so remains a priority. We are able to do this because of our stable business model that produces strong, consistent free cash flow.

Now, it was approximately eight years ago that DineEquity was created. Over that time, we have regularly and reliably delivered on our stated goals, and we've never stopped looking towards the future.

To continue driving the business forward and to lay the groundwork for DineEquity's evolution and future success, we are currently implementing a strategic initiative designed to address two imperatives across both brands: generating additional organic growth across the business and accelerating the development of traditional and nontraditional locations. These, combined with other strategies we will implement, are designed to ensure that IHOP and Applebee's are positioned at the forefront of consumer relevance.

Now, there is no better way to measure consumer relevance than by generating organic growth. We are taking a multipronged approach to create deeper engagement with our guests that will translate into greater frequency of use. Through initiatives focused on menu innovation, daypart expansion and additional development, there are ample opportunities to grow the business organically.

At the same time, in our efforts to accelerate development, we've made substantial progress on a number of key initiatives, including creating new prototypes, remodels and designs that will reinforce the power of our brands and better meet the needs of today's consumers.

As part of this, we are also evaluating smaller building footprints to create new opportunities in both traditional and nontraditional locations. We are encouraged by our experiences internationally and fully intend to leverage this knowledge in a way that only a company with our resources and reach can accomplish. In the end, it's all about bringing our brands to guests where, when and how they want to enjoy them.

In support of this plan, we have made an important strategic decision designed to help us go further faster, to create an organization that is quicker, more nimble and more collaborative than we are today. I am referring to our decision, announced last month, to consolidate our core restaurant and franchisee support functions in Glendale and wind down operations in Kansas City.

Simply put, the historical legacy of two headquarters separated by half the country does not meet the operational capabilities we need to successfully execute our growth plans, and moving now to create an organization that does is a strategic priority for us. Our talented teams across both brands are excited about the opportunity to work more closely together.

So, let's turn to the brands, starting with Applebee's. After five consecutive quarters of positive comp sales, Applebee's third-quarter comp sales declined slightly by 0.5%. Make no mistake, this is unacceptable to us, and we are working to restore consistent and sustainable positive performance.

After careful analysis, it is clear that the work we've done to date on the Applebee's brand has not been enough. While necessary and fundamental to the brand, our strategy has been too subtle and incremental. We simply have to move faster, think bigger and differently. The consolidation, which is not about saving costs, will help us to achieve these objectives. We are currently working on a few big ideas that have the opportunity to separate us from the pack in casual dining.

For competitive reasons, I won't share specifics today. But I can tell you that we are going to execute a very aggressive and very focused playbook, and we expect to see some of the results during 2016.

Over the last two years, we have engaged in the most comprehensive research in Applebee's history and will employ the insight we've gained. Be assured we have not only alignment and full support, but a mandate from our 33 franchisees to move ahead boldly.

Having only 33 franchise owners is a huge advantage for Applebee's, and we will work more closely than ever to ensure we are nimble, quick and proactive. Simply put, we are going to change the story at Applebee's.

We are taking a deep look at where we are, where we need to be, and what it will take to get there. And our roadmap is based on four critical areas of focus that we believe will begin to change perception in both the near and long term.

Our internal measures tell us we've made significant strides in improving the quality of our food and service. But it is not happening for every guest on every visit. To correct this, we are focused on in-restaurant training to improve speed of service and consistency. Additionally, we are also working on new platforms in the front and back of the house to elevate the guest experience.

Our brand reinvention efforts are well underway. In addition to our newly implemented menu platform, we are testing several initiatives, including bar revitalization, as discussed on the last call; a new building prototype; and a remodel. I believe it is going to require substantially more work on the menu and the atmosphere.

Today, the restaurant experience goes well beyond food, service and environment. We know technology is playing a bigger role in the overall experience. As we continue our work on guest-enabling technology, we realized that today's guest is more technologically savvy than ever before, and their needs and desires must be at the center of all decisions and strategies. All of these areas of focus are designed to generate organic growth.

We also need to grow by accelerating new restaurant development. While still a work in progress, we've seen measurable results on multiple initiatives and continue to look at opportunities to extend the reach of the brand both domestically and internationally.

As we previously shared, I've assumed the role of Brand President for Applebee's, and I will remain in this position until we are back on course. I have extensive knowledge of the Applebee's brand and a long history with the franchisees. So I am looking forward to working closely with the management team and principals to execute our strategy.

I have even more confidence in our ability to succeed after recently completing another great Applebee's franchise conference. I can tell you that our 33 franchisees are 100% aligned and fired up about the bold initiatives we are undertaking in 2016 to change the story at Applebee's, to further differentiate ourselves from the competition and to change the perceptions of the brand.

Now let's turn to IHOP. I am very pleased to announce that IHOP posted a solid 5.8% increase in third-quarter comp sales. The impressive performance was partially driven by elevated guest service and our successful Summer Stacks Pancakes and Double-Dipped French Toast promotion, both of which drove strong sales mix.

IHOP, by the way, is the brand that has offered all-day breakfast for 57 years, achieved positive comp sales across all dayparts. Our ongoing drive to innovate and a focus on flawless execution are at the heart and are the driving forces of our success and momentum. Rest assured IHOP's solid performance has not made us complacent. In fact, we are more energized than ever.

Our focus on flawless execution has allowed us to improve consistency in terms of the restaurant experience, addressing guest satisfaction, food quality and speed of service, resulting in ongoing momentum.

Nearly 10 years ago, we implemented our AB grading system to measure our franchisees' operational performance. And over the years, while continually raising the bar, we have seen significant improvement in consistency of operational standards from restaurant to restaurant. The ongoing focus on operations improvement translated into not only the highest guest loyalty index scores in the last five years, but also positive year-to-date traffic.

Getting to market faster helps keep us ahead. It helps drive sales and traffic and helps to continue differentiating ourselves from the competition. We are working harder to accelerate the introduction of new initiatives, new menu items and platforms to the marketplace sooner in order to stay ahead of the competition.

We have a relentless focus on growing our business organically through our marketing, our ongoing menu innovation and continuous operations improvement. Accelerating development and getting to market faster are also very important parts of our strategy.

To this end, we are working to create a new prototype and remodel package to further accelerate development. Both are at various stages of testing with consumers, but we are excited by the initial feedback from our guests and our franchisees.

Our IHOP franchisees are very supportive and committed to development, as evidenced by their stable history of building between roughly 50 and 70 new restaurants, gross, each year for the last decade. As a complement to our organic growth, we look to new restaurant development to grow market share, as we have done consistently for the last nine years.

I am very proud of the hard work being done in our restaurants and our restaurant support center. I am thankful to our team members and franchisees for their hard work to make this a successful event and quarter.

Having just completed a very successful IHOP franchise conference, I am pleased to say that we have very strong alignment with our franchisees and their ongoing support. We are more engaged and focused on our shared goals than ever before. Looking ahead, I am incredibly confident in our team, our franchisees and our future.

With that, I will turn the call over to Tom to walk you through the third quarter's financial results. Tom?

Thanks, Julia. I will start with a brief discussion of our financial highlights, beginning with the income statement.

We were very pleased to report a 25% increase in third-quarter adjusted EPS of $1.43 compared to $1.14 for the same quarter last year. The solid gain was primarily due to significantly lower interest expense as a result of our debt refinancing that was completed in the fourth quarter of 2014. In addition, higher gross profit due to an increase in IHOP's domestic sales and IHOP restaurant development over the last 12 months were solid contributors.

Total revenues were flat from the prior year's third quarter, mainly due to the impact from the previously announced sale of the remaining 23 Company-operated Applebee's. Completed in late July, this transaction resulted in roughly $9 million in gross proceeds and a financial statement gain of approximately $2 million.

Regarding G&A, G&A in the third quarter was approximately $42 million. G&A would have been $38 million but for approximately $4 million in nonrecurring consolidation charges. The $38 million reflects an increase of $4 million over the third quarter of last year, primarily due to higher personnel-related costs and increase in expenses for professional services and consumer research, as well as higher depreciation.

Regarding the consolidation, we had initially estimated that the move would result in approximately $3 million of nonrecurring pretax charges this year. Based on updated estimates for severance and other personnel costs, we now estimate that the total costs in 2015 will be approximately $5 million pretax. The variance is due to a slightly different mix of personnel remaining with the Company, as well as some costs planned for 2016 for relocation and recruiting that will now occur in 2015.

We continue to stand by our guidance for the full year and expect G&A to range between $149 million and $153 million, excluding the roughly $5 million in consolidation costs expected during fiscal 2015.

Now, regarding the tax rate, our effective tax rate for the third quarter of 2015 was 38.7% compared to 36.5% for the third quarter last year. The slight increase was due to the timing of certain book and tax differences. We reiterate our tax guidance for the full year of approximately 38%.

Now, a few comments on the cash flow statement. Cash flows from operating activities were $70.6 million for the first nine months of 2015 compared to $102.4 million in the same period last year. The main reason was a decline in changes in working capital, partially offset by the positive impact of significantly lower interest expense and higher gross profit.

The change in working capital for the first nine months of 2015 compared to the same period of 2014 was due to three factors: one, $28 million related to the timing of interest payments on our long-term debt; two, $18 million related to the timing of advertising- and marketing-related accruals; three, and higher estimated income tax payments in 2015 compared to 2014.

Now, an update on returning cash to shareholders. Year to date, we returned approximately $100 million to shareholders in cash dividends and share repurchases combined.

Turning to our performance guidance for fiscal 2015, I want to highlight a few changes, but please see our press release for more details.

We now see cash from operations for the full year trending to the low end of the guidance range of between $115 million and $125 million. However, with favorability in CapEx and higher net receipts from notes and equipment contracts receivable, we now expect free cash flow to increase to between $120 million and $130 million. This excludes the proceeds from the sale of 23 Company-operated Applebee's, which is available to return to shareholders.

And with that, I'll now turn the call back over to Julia for closing comments. Thank you.

Thanks, Tom. To close, we had a strong quarter, highlighted by healthy growth in adjusted EPS. We continue to generate substantial free cash flow and reaffirmed our commitment to return a majority of it to shareholders through an increased quarterly dividend and share repurchase authorization.

We are taking aggressive steps to drive additional organic growth and development from our brands. At IHOP, we are relentlessly working on several initiatives to sustain the strong momentum we have built. And at Applebee's, we are focused on the brand reinvention to further differentiate ourselves and build an insurmountable lead in the category.

Of course, we remain committed to innovation at both brands and building the platform for sustainable growth, including a potential acquisition that is a strategic fit and doesn't compete with our two current brands. We have a great team in place, the right resources, a solid track record of achieving our aggressive goals, and solid collaboration with our franchisees, who are some of the best operators in the business.

And now, Tom and I would be pleased to answer your questions. Operator?

(Operator Instructions) Brian Vaccaro, Raymond James.

Just wanted to ask about Applebee's and sort of the comp softness you've seen there. And can you give some perspective, maybe talk about trends through the quarter, maybe comment on lunch versus dinner versus nonpeak, and maybe any pockets regionally that stood out to you in the quarter?

There wasn't really a marked difference in the quarter, and there wasn't a marked difference by the area of the country, nor was there a marked difference by lunch or dinner or any of the dayparts. There's nothing really to comment that is extraordinary one way or the other.

Okay.

Yes, it was pretty consistent.

Okay. And I guess more broadly, Julia, I guess any perspective on sort of the broader consumer backdrop, anything you are seeing in your data that might help explain why industry trends have sort of flipped to slightly negative in recent weeks? That would be great, too.

Yes, as you know, we don't comment on intra-quarter. But I would say in the third quarter, we know that Applebee's did not do as well as the rest of the casual dining category. And that is unusual. As you know, we have been better than the category for many, many, many, many months. And so this was a change in third quarter.

But I think it really demonstrates what I talked about earlier, which is this notion that we have to be much bolder. We are so big and we produce so much that I think we've got to think differently about how we step out of the box of incremental menu items and the like and really begin thinking differently. And I think that is the real focus for us.

Okay, all right. Shifting gears, I know it is still very early on, only a couple months since your new VP of Development joined. But can you give sort of an update on where your thinking is sort of on the potential domestic growth going forward? You mentioned the new prototypes and designs and that sort of thing. But is that something we could see as we move into 2016 and to 2017 possibly as an incremental growth driver domestically?

Right, it's a fair question. I think there are two things that I should be prepared to do by the next earnings call, which will be year-end, which is in February. I think we will be able to give you a better sense of how much we can escalate the existing development, more for the 4,900-square footprint for both brands in 2016, and then what nontraditional work can get done as well, and how much of the remodel at both brands can get done. I think we will have a better sense of not only the what, but the how.

Right. Okay, all right, we will look forward to that. And then just one, Tom, one last numbers question. The charges, you mentioned the shift -- the old charges were expected to be $3 million in 2015 and $10 million in 2016 on the consolidation. So the total has not changed, it is just really a timing shift; is that right?

Yes, I mean, at the outside, it could be that we see a little bit more next year, but it isn't anything significant. It is really a timing thing and a different mix of people.

Okay, and can you just remind us, of those, say, $13 million, roughly, of charges, sort of the cash versus noncash components in that?

This is Gregg. A significant -- all of it will be cash in the future, but some of that $10 million next year relates to the remaining payments on the lease through 2021.

Pulling ahead of the lease payments in Kansas City.

Yes. But, for next year and this year, about half of that will be cash that would not apply to 2017, in years 2017 to 2021.

That's right.

Okay, very helpful, thank you.

John Ivankoe, JPMorgan.

Julia, early on in your prepared remarks, when you were discussing the two imperatives, and one of which is additional organic growth, did I hear you correctly, that you talked about daypart expansion? And to what brands would you be referring, and how big of an opportunity is that, if I heard that correctly?

I think there is probably an opportunity to optimize at Applebee's and an opportunity to expand at IHOP. We think there are some things that we could be doing, especially at the dinner daypart that we haven't done before, and then we think there are some opportunistic things that we can be doing that we have not done to date. So it is a little bit of both, but I think it is -- in terms of expansion, it is probably more at the IHOP domestic business.

Okay. And in terms of either selling more non-breakfast food at IHOP, I can remember that being kind of a focus point at that brand probably 10 or 15 years ago -- so, what could be different? And I think all stores -- I don't know if they are all open 24 hours, but certainly they are all open for the dinner daypart already. So, can you elaborate a little bit more just in terms of how significant that could be and what you could do?

Well, it is funny that you say that, because right before I joined IHOP, they actually were very focused on doing different food types. And I think the reality is this notion that we are the only people who have been serving breakfast all day for 57 years, and we do get some credit for that. We think there is some real opportunity to extend that, maybe not the items, but the notion of the daypart and to dinner. Said differently, offering breakfast all day and doing some things differently at the dinner daypart could be really intriguing in terms of interest level from consumers, or at least that is the preliminary work that we've done that suggests we could be expanding the daypart, not necessarily by dinner items, but different types of items at the dinner daypart.

That is intriguing. There is always an opportunity to get more people on 24/7. About three-quarters of the brand is on 24/7 now, but there is always an opportunity. A lot of that is driven by the trade area. There is always opportunities to do a little bit more of that. And we think there are some expansion opportunities there. And obviously some of the other areas which we did not talk too much about, but think about us being highly competitive in different spaces than we have been today, including coffee.

Okay. And then secondly, if I may, on Applebee's, also referencing your prepared remarks, where you mentioned needing more menu and atmosphere work; I am loosely paraphrasing that. But the word value didn't come up. Should we assume that kind of you being aggressive at Applebee's and trying to turn around the brand can occur without some kind of price investment or lowering prices or focusing on national price points, what have you, or can that be done just simply on a menu and atmosphere, with you maintaining or even increasing your average ticket?

Yes, I think we are very focused on price/value, which as you know is not just about price, but about what you provide the consumer. And we think, we know, there is a huge opportunity at Applebee's to give people a $20 experience for $10. And we are incredibly focused on that at Applebee's through the work we are doing with server training, the work we are doing with the bar reinvention, the work we are doing on the menu, the work we are doing throughout the restaurant. There is a tremendous opportunity.

And we know this for a fact, that consumers would love to have a $20 experience for $10. We think we have some very specific ways to do that. I don't want share too much of that, for competitive reasons, but we think there is a lot of upside there.

Of course. And finally, if I may, obviously understanding you don't, I think, operate any stores anymore, but in terms of working with your franchisees, labor cost per hour is going up, and we know that. So, what and how are you and the franchisees working together to moderate that cost? And is there anything from a technology or procedure point of view that actually may allow them to do the right service jobs and actually reduce the number of labor hours that are in the store?

So, that is absolutely correct, that the cost of labor is going up. I think, first and foremost, I would give us an A-plus-plus for what we have been able to do on the food cost side of the business to minimize any of the inflation through this $2 billion purchasing co-op, which has been incredibly successful. And we are now launching into nonfood -- everything from equipment, furniture, small wares, gift cards.

So we've been relentlessly focused on that, continue to do so. And I think the franchisees are thrilled with the results, because that enables them to pass that savings on to the consumer.

On the labor side, there's a couple of things that we are looking at, working with our franchisees to collaborate, some of the best-demonstrated practices that we are seeing across the country, not to mention some additional work we can do. And certainly they have challenged us to look at technology. And we will certainly take a look at that. But part of that is the simple notion of recognizing that we, along with the rest of the country, may have to take some price increases. And we have been very mindful of that and trying to be very thoughtful about what that looks like and minimize the impact to the consumer, but recognizing everyone may have to take a price increase.

Understood. Thank you.

Michael Gallo, CL King.

I just want to delve in a little bit on IHOP. Obviously, it's another strong quarter. You've had great momentum in that brand for some time. I was wondering when you parse out the trends at IHOP, where you are seeing the greatest strength. Is it at the core breakfast? Are you seeing good growth outside of lunch? Is it midweek? Is it just across the board? Thanks.

Michael, I am so glad you asked that question, because I get to tell you, it is everywhere. It's breakfast, it's lunch, it's dinner, it's late-night. It's every daypart, it's throughout the day. It is everything at IHOP. It is sales, it is traffic, it is all doing extremely well. Across the country, across the board, I would call it an A-plus-plus.

And then as just a follow-up to that, I know you were able to get the marketing, the TV dollars up this year over last year. Would you expect you'll be able to have another increase in the dollars allocated to TV as you look to 2016?

Yes, I may not have been clear in prior calls. That is a three-year commitment. It is all of 2015, it's all of 2016, and it's all of 2017. It is the same increase for three years.

Thank you.

Alton Stump, Longbow Research.

I guess just as far as your overall competitive environment, obviously there has been a couple bar-and-grill-focused names that have put up some weak comps here for calendar 3Q. How much worse did you see competition get? Is it more internal, or is it more of an external factor, do you think, that drove the weak performance for Applebee's?

Yes, I have answered this question before, and I know this probably frustrates everyone. We don't see a real difference in our sales or traffic driven by the competitive set. The large majority of the category is independents. And the truth of the matter is, when we steal share, we are going to steal share from largely the independents.

We don't see a lot of shift one way or the other because a competitor went on television and said something or drove a price point. That is not really what our nemesis is, or our focus. It is really us differentiating ourselves in the category. What our consumers tell us is they see in general in the casual dining category a lot of sameness, and our whole focus is really on differentiating ourselves from everyone else in the category.

And that is what I was speaking to earlier. This notion of being bigger and bolder is really focused on, once and for all, just separating us from the entire category. That is what we are really seeing. It is not anything that is particularly a price point or a promotion. That is just not what we are seeing at all. And that hasn't been for some time. That has really not been our issue.

That's helpful. Thanks, Julia. And then I guess just one quick follow-up, and I will hop back in the queue. And this is more of a conceptual question, but obviously you've had a huge success with IHOP. Applebee's has just turned the other way here of late. Is there anything, as you kind of think about what has driven the success with IHOP, whether it is driving mix with a better appetizer showing? Obviously it is a different concept and a different subcategory at Applebee's, but is there anything that you can sort of use or, if you will, learn from your success at IHOP to hopefully carry over to Applebee's?

Yes. Great question. It is a couple of very specific things. One is a very focused management team and a very focused group of franchisees who don't try to do 20 things, but do a couple things outstanding. That is the focus we've had at IHOP. That is the focus we are going to get at Applebee's. That is number one.

Number two is, it is not any one thing. It is all of those things in combination. So it's the effort on operations, this incredible maniacal focus on advertising. It's focus on innovation. It's doing all those things simultaneously. It's not sequential. It's doing them at at once and getting maniacally focused on doing a couple of things well.

I never want to underestimate the power of the execution on the IHOP side and doing that same execution on the Applebee's side. And quite candidly, there is a huge advantage on the Applebee's side. It is not 365 franchisees like it is on the IHOP side. It's 33 franchisees who own all the restaurants in the domestic US and getting them maniacally focused.

And the great news is I couldn't be more complementary of the work, the effort and the commitment these franchisees have to do whatever it takes to break out of the mold. And that is the best news of the day. I just literally came from being with all of them in Miami, Florida, and they are maniacally focused on doing just that. So that is the best news of the day.

Got you. Thanks so much.

And we have no further questions at this time. I will now turn the call over to Julia Stewart for closing remarks.

Thanks, operator, and thank you all for joining us today. We are scheduled to report the fourth quarter on February 24. If you have any questions in the meantime, please feel free to call myself or Tom or Ken. Thanks again.

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