Dine Brands Global Inc (DIN) 2018 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2018 Dine Brands Global Inc. Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ken Diptee, Executive Director of Investor Relations. You may begin.

Good morning, and welcome to Dine Brands Fourth Quarter and Fiscal 2018 Conference Call. I'm joined by Steve Joyce, CEO; Tom Song, CFO; Darren Rebelez, President of IHOP; John Cywinski, President of Applebee's; and Greg Kalvin, our Corporate Controller, will be available during Q&A as well.

Before I turn the call over to Steve, please remember our safe harbor regarding forward-looking information.

During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which were detailed in today's press release and 10-K filing. The forward-looking statements are as of today and assumes no obligation to update these statements. We may also refer to certain non-GAAP financial measures, which were described in our press release and available on our website.

With that, I'll now turn the call over to Steve.

Thanks, Ken. Good morning, everyone, and thank you for participating today. In our press release issued this morning, you saw that we finished a strong year with a very solid fourth quarter results. We continued to deliver year-over-year double-digit growth across key metrics, including total revenues, gross profit, adjusted EPS as well as adjusted EBITDA.

My initial full year as CEO of Dine Brands was a transformative year for the company. We stayed the course and executed against a multipronged strategy focused on returning Dine Brands to a growth company. With a performance-driven value-based culture firmly in place, I am very confident in our go-forward plans.

Following our transitional period in 2017, this year was dedicated to enhancing brand relevance and building momentum at Applebee's and IHOP while driving growth. To that end, I'm pleased to report that both brands achieved positive comp sales growth for 2018, and this momentum continued into January.

And while Darren and John will go into more brand-specific details a little later, I'd like to highlight several of our notable achievements this past year. First of all, we returned to nurturing a winning leadership team and trusted franchisees; we increased investments in research and consumer insight; we are enhancing guest and team member engagement through consumer-facing technology and CRM; we have a focus on traffic-generating menu innovation and abundant value and giving everyone a reason to visit our restaurants; we're accelerating restaurant unit growth; and we are also accelerating, in big numbers, our off-premise business.

On the Applebee's front, there was a marked improvement in overall Applebee's franchisee financial health and nearly all Applebee's franchisees agreed to temporarily increase their advertising contribution rate by 75 basis points to 4.25%. Additionally, Applebee's achieved the highest quarterly comp sales increase in 14 years in the third quarter, posting growth of 7.7%.

Turning to IHOP, our franchisees and area licensees developed 34 net new domestic restaurants, marking at least a decade of consecutive net development growth. IHOP returned to positive comp sales in 2018 and ended the year with a very, very solid quarter. The brand also took innovation to the next level, creating the most buzzworthy media campaign in its history with the Ultimate Steakburger launch.

Additionally, both Applebee's and IHOP reached all-time highs in their overall guest satisfaction scores. And lastly, both brands experienced strong growth in their off-premise business.

Regarding Dine overall, our highly franchised model produced stable and robust adjusted EBITDA margins of approximately 45%, excluding advertising revenues. There was a substantial year-over-year decline in bad debt expense compared to 2017, and we significantly upsized our VFN to $225 million from $100 million, which gives us much more financial flexibility.

These accomplishments, to name a few, have helped to better position us for a long-term success and provide a very solid foundation for us to build on.

We have a plan in place, which we believe will sustain our current trajectory. Looking forward, we are very encouraged about 2019 and the years ahead. Importantly, this year, we'll provide a better picture of our untapped potential, as it reflects a cleaner slate for several reasons. Let me add a little bit of color. Notably, the $30 million contribution that we made to Applebee's national advertising fund was completed in the first half of last year, and it is nonrecurring. We have improved visibility into royalty collections. Additionally, we reached a favorable settlement in December with one of our largest Applebee's franchisees. The terms, among other things, required the franchisee to pay us approximately $12.5 million for past due royalties and advertising fees in total. This plus the other resolutions have essentially resolved all of our franchisees' issues for Applebee's.

With the positive momentum of both brands, we are in an even better position to drive accelerated, profitable growth with continued strong support from our franchisees. We will focus on growth platforms, which are gaining traction. These include exploring significant opportunities to develop in urban and rural areas as well as leveraging nontraditional and small formats to penetrate higher cost trade areas and further embracing technology to enhance the guest experience.

We believe our off-premise businesses at both brands can produce continued strong growth. For 2018, Applebee's and IHOP's off-premise comp sales increased by approximately 32% and 30%, respectively, driven mainly by double-digit traffic growth. We also view our international operations as a potential growth engine. Approximately, 7% of our restaurants are outside of the U.S. The interest in our brands internationally remains healthy, primarily on the IHOP side. Most recently, the brand expanded its presence into Thailand and announced plans to grow its footprint in South America under separate franchise agreements to build 25 restaurants in Peru and 12 restaurants in Ecuador.

With that, I'm going to turn the call over to Tom to provide you a little more detail on the numbers.

Great. Thank you, Steve. Good morning, everyone. Our highly franchised business model continued to produce impressive results. I'll provide a brief review of the highlights for the fourth quarter and full year. But before I do, I'd like to provide you with my perspective on our performance.

Dine Brands finished very strong in 2018, with our adjusted EPS results exceeding the high end of our guidance by $0.12 per share. We have both brands performing at the top of their categories and near the top of the industry. We have prioritized the return of capital to shareholders while our leverage has decreased. Later, I will review our guidance for 2019, which reflects the strong finish to 2018 and our continued confidence in our company.

I'll start with the notable changes on the income statement. For the fourth quarter, adjusted EPS was $1.70 compared to $0.48 for the same quarter of 2017. The increase was primarily due to a 46% increase in the franchise segment profit, which is mainly driven by comp sales growth at both brands, a decline in bad debt expense compared to the fourth quarter of 2017, and the collection of previously unrecognized royalties.

For fiscal 2018, adjusted EPS was $5.37 compared to $4.09 in 2017. The increase was mainly due to lower income tax expense and higher franchise segment profit, which is primarily due to the higher comp sales at both brands and the favorable resolution of certain franchisee financial health issues, which resulted in lower bad debt expense and cash collections of previously unrecognized royalty revenues.

I'm pleased to report that bad debt declined by approximately $13 million for 2018 compared to the prior year due to the marked improvement in Applebee's performance and the favorable resolution of these franchisees' financial health issues just discussed. Importantly, for 2019, we anticipate that bad debt will now return to historical levels, which is a not meaningful level.

Turning to G&A. Our G&A for the fourth quarter of 2018 was approximately $45.3 million compared to approximately $40 million for the same period of last year. The increase was primarily due to higher personnel-related costs, costs related to the acquisition of 69 Applebee's restaurants announced in December and increased legal expenses. The increase in personnel-related costs were related to performance-based incentive compensation.

G&A for fiscal 2018 was approximately $167 million compared to approximately $166 million in 2017. As a reminder, there were some reprioritization of technology projects during 2018 that also contributed to higher G&A. These items were offset by decline in severance costs and professional services costs.

Regarding our tax rate. Our GAAP effective tax rate for fiscal 2018 was 27.4% compared to 20% for fiscal 2017. During 2018, we increased our tax provision by approximately $5.1 million related to adjustments resulting from IRS audits for tax years 2011 through 2013. This action increased our effective tax rate from what has been an estimated combined federal and state tax rate of approximately 25%.

Turning to cash flow statement. Our highly franchised model generated strong adjusted free cash flow for 2018 of approximately $141 million compared to approximately [$63 million] (corrected by company after the call) for 2017. The favorable variance was due to the increase in cash from operations due to higher net income, favorable changes in working capital and an increase in receipts from notes and equipment contracts receivable compared to 2017.

Consolidated adjusted EBITDA for 2018 was $230.6 million compared to $221.3 million for 2017. The increase was primarily due to higher franchise revenues and gross profit in 2018 compared to 2017. I would like to highlight that both brands contributed to solid performance in 2018.

The return of capital to our shareholders remains a top priority. In 2018, we returned a combined total of over $84 million to shareholders. To provide some color, we paid $51 million in quarterly cash dividends and repurchased nearly 479,000 shares of our common stock at a total cost of approximately $34.9 million.

As you saw in our press release today, we increased our quarterly cash dividend by 10% to $0.69 per common share. The increase further reflects confidence in our business model, which generates stable and predictable cash flow. Additionally, our Board of Directors approved replacing our existing share repurchase authorization with a new authorization of up to $200 million.

Now I would like to briefly comment on the implementation of ASC 842 regarding new lease accounting guidance. We're required to adopt the new guidance effective in 2019. As a result, we'll have to put up a liability and an offsetting asset on the balance sheet. There will not be any net changes on the P&L, and we do not anticipate any geography changes.

Finally, I'll discuss the highlights of our financial performance guidance for fiscal 2019. Please see the press release we issued today for complete details on our guidance. We expect comp sales at Applebee's to range positive between 2% and positive 4%. At IHOP, we expect comp sales to be between 2% and positive 4%.

Our comp sales guidance for both brands reflects the continued implementation of sales and traffic-driving initiatives to drive continued momentum. Total segment profit, which excludes the company restaurant segment, is expected to be between approximately $373 million and $394 million.

Consolidated EBITDA is expected to be approximately between $268 million and $277 million, inclusive of company restaurant segment EBITDA, which is expected to range between approximately $9 million and $11 million.

We expect net closures of between 20 and 30 Applebee's restaurants globally, the majority of which were expected to be domestic closures. Please note that these closures are part of our system-wide analysis to continue to improve the health of our franchise system.

At IHOP, we expect our franchisees to continue to have development appetite with projected net openings to range between 35 and 55 new restaurants globally, the majority of which are expected to be domestic openings.

G&A is expected to range between approximately $165 million and $170 million, including noncash stock-based compensation expense and depreciation of approximately $40 million. I would like to highlight that this range is inclusive of approximately $6 million of G&A related to the company restaurants segment.

Lastly, adjusted earnings per diluted share for 2019 is expected to be between $6.90 and $7.20.

To close, 2018 was a very solid year for our brands. Looking ahead, we will continue to focus on the execution of several strategies to deliver top line and bottom line growth while creating value through our growth initiatives and return of capital to shareholders.

So with that, I will now turn the call over to John.

Thanks, Tom, and good morning, everyone. We're certainly very pleased with Applebee's momentum, as Q4 represented our fifth quarter of positive comp sales growth. Applebee's plus 3.5% performance on top of our prior year's plus 1.3% performance resulted in a healthy plus 4.8% 2-year comp sales increase for Q4. And, once again, according to Black Box, Applebee's has outperformed every category of the restaurant industry on comp sales, including QSR, fast casual, family dining, casual dining, upscale casual and fine dining. From my perspective, this is yet another indicator that Applebee's business model is stable, predictable and very capable of lapping prior year success.

Most notably, 2018 was a milestone year for Applebee's as our plus 5% full year comp sales increase represented the best annual performance Applebee's has posted in 25 years. This result can be attributed to our truly exceptional franchise partners and our very talented and committed Applebee's team. Together, we reestablished Applebee's as a vibrant and innovative brand, with clear strategic vision and a commitment to sustain growth. Without question, Eatin' Good in the Neighborhood remains the centerpiece of our success. This brand position is both differentiating and relevant, as it embodies who we are and what we stand for at Applebee's, and its authenticity clearly resonates with all of our guests.

Most importantly, Eatin' Good drives our strategy around operations, culinary, beverage, off-premise, neighborhood activation and, of course, our advertising, which we continue to believe is best-in-class in the restaurant industry.

I'm also proud of our restaurant excellence as we continue to surprise and delight our guests with a consistently great experience. This is evident in all key operating metrics from guest satisfaction to value for the money.

Our culinary strategy remains focused on abundant and indulgent value, with a focus on mainstream recipes and flavors that our restaurant teams can execute at a consistently high level. Innovation here will be smart, selective and fully validated as was the case with our very successful pasta and breadsticks introduction in Q4.

Now beverage and off-premise continue to be meaningful drivers of innovation and results. Each business segment represents a distinct occasion for us with very specific guest profiles and need states that we leverage in our messaging and our execution. While not yet fully optimized, we view beverage and off-premise as incremental growth engines for the brand.

And Applebee's advertising continues to connect emotionally with our guests. There's no better example of this engagement than our very relatable Runaround Sue, our most recent To Go ad, which I hope you've had a chance to see on air over the past few weeks. Applebee's To Go business grew at a rate of approximately 30% in 2018, substantially outperforming casual dining, again, according to Black Box. While To Go remains our top off-premise priority or focus in '19, we continue to optimize and expand both delivery and catering.

Now on the portfolio front, as Steve highlighted, we acquired 69 restaurants, franchise restaurants in North and South Carolina in mid-December. We've been readying for this company-owned operation for a while now, and we're very encouraged with the team's early leadership and execution. At present, this geography is currently outpacing the system from a comp sales perspective. In fact, this is a trend we see at Applebee's, as our new franchisees and new owners now rank #1, #2 and #3 in year-to-date comp sales performance across the system. And after only 2 months of ownership, we remain confident in achieving all business goals related to this portfolio, and we'll certainly keep you informed as we progress here.

Turning to our full U.S. restaurant base as previously outlined, Applebee's closures will slow in 2019 as we approach a normalized closure rate of approximately 1% in 2020 and beyond. Another very important sign of brand's health is that ad fund and royalty delinquencies, which represented a significant challenge in '17 and '18, have essentially disappeared here in 2019.

Finally, we simply love our position in this market. We set a bold goal to become the most improved restaurant brand in America in 2018, and we absolutely delivered on that goal. Applebee's business fundamentals are now sound. Our restaurant execution is significantly enhanced. Our franchise partnership is stronger than ever, and we remain confident in our ability to sustain this momentum moving forward.

With that, I'll turn it to Darren.

All right. Thanks, John. Good morning, everyone. Over the last year at IHOP, we focused on executing against a broad strategy underpinned with specific measurable actions intended to generate immediate results and to fuel future growth. Serving as our road map, this strategy includes 4 key pillars: significantly enhancing the guest experience, running great restaurants, driving traffic and being where the guest is. The significant work done under each pillar has played an integral role in the success we're experiencing today and has addressed all aspects of the guest experience, both in our restaurants and off-premise. I'm very pleased to report that this holistic approach has produced another outstanding quarter for the brand and our best in 2018.

IHOP's comp sales for the fourth quarter rose a solid 3%, which represents the fourth consecutive quarter of positive comp sales growth. Not only was this our top quarter of the year, but it was our highest quarterly comp sales increase since the third quarter of 2015. This also marks the fourth consecutive quarter that IHOP outperformed the family dining category based on comp sales.

On a full year basis, comp sales grew 1.5%, and total revenue grew 3.9%, both of which were the brand's best performance since 2015. This is quite an accomplishment and clearly demonstrates the strength of our strategic plan and the love people have for our iconic brand. I couldn't be prouder of our team members and franchisees for everything they've done to achieve these results.

Thanks, in large part, to these efforts in the past year, we believe there are several drivers that will contribute to sustainable positive sales. First, we successfully changed the narrative regarding lunch and dinner occasions at IHOP, which were the strongest day parts for both the fourth quarter and full year. With abundant value and variety on our menu, we've proven that we can attract guests any time of the day. While breakfast will always be our focus, the PM day part has continued to represent largely untapped white space for us to grow in.

Consistent with that theme, our Ultimate Steakburger platform continues to help drive positive results. Burger sales remained strong in the fourth quarter and are still more than double the levels we had before the burger launch.

Second, we're seeing solid growth in our off-premise business, which is primarily driven by traffic. For the fourth quarter, To Go comp sales increased by a strong 23%, and To Go comp traffic rose by approximately 13%. Online orders represent a significant opportunity for us, as the average check for online orders is approximately 31% higher than all other To Go orders.

With the increasing relevance of online ordering, we believe there is significant upside potential. Our online ordering system, enhanced website and new mobile app have all created a complete omnichannel experience for our guests. And best of all, online ordering isn't just more efficient, it's more profitable.

To address the convenience needs of our guests, we've launched our initial nation-wide delivery program in partnership with DoorDash last July. In just 6 months, we've tripled the number of participating IHOP restaurants in DoorDash, bringing our total to more than 1,000 restaurants currently with another 300 restaurants expected to be added to the DoorDash platform by the end of the year.

This year, our focus will be on expanding our relationships with another leading delivery service providers as well as increasing marketing efforts aimed specifically at building awareness around our IHOP 'N GO program and driving new and repeat off-premise business.

We believe delivery will provide even further upside to our already strong To Go business, which accounts for 8% of overall sales, an increase of 200 basis points from the fourth quarter last year.

Another component to being where the guest is, is putting more IHOP restaurants where our guests won't go. I'm happy to report that we had another strong year with new restaurant development. We ended the year with a net increase of 34 IHOP restaurants domestically and another 11 internationally. This is in stark contrast with the rest of the industry, and we expect this positive development trend to continue for IHOP in 2019.

Turning to the third driver, the remodel program, which plays an important part in shaping guest perceptions of the brand. Our guests wanted a modern comfortable restaurant that exceeds their expectations, and we gave it to them with our Rise N' Shine remodel. We're currently testing the second iteration of the Rise N' Shine remodel, which includes new guest-facing technology that enhances the overall dining experience, such as our no wait tool to provide more accurate wait times, server tablets to increase order efficiency and accuracy, and wireless credit card devices to allow guests to easily pay while retaining possession of their credit card.

This year, we completed another 275 remodels, bringing the total number of restaurants with the Rise N' Shine image to over 1,000 when combined with new restaurant openings.

Fourth, we sharpened our focus on all aspects of the guest experience and operational improvement. We achieved the highest scores among our peer group for overall guest satisfaction and revisit intent, thanks to our renewed focus on our iHospitality service program. In fact, we achieved an all-time high overall guest satisfaction score in October, which indicates our guests are seeing the tangible efforts of our results.

Lastly, our strong brand equity with consumers enables us to leverage enticing promotions to drive guests into our restaurants, such as our popular All You Can Eat Pancakes with any breakfast combo and our award-winning Grinch limited-time offer, which pairs the universally beloved entertainment property with wow-worthy menu items and Kids Eat Free value offer.

To close, we have a lot to be excited about at IHOP. We're heading into the new year with a lot of great momentum and our efforts around menu innovation, day part expansion, off-premise initiatives and developments that help accelerate our growth by continuing to focus on our broad-based plan and delivering against our 4 key pillars will continue to expand our lead in family dining.

It was an incredible year for IHOP, with several notable highlights, including our 60th anniversary, creating a media buzz with the IHOP name change campaign to launch our Ultimate Steakburger platform and opening our 1,700th domestic IHOP.

I'm confident that 2019 will be yet another successful year for the brand.

And with that, I'll turn the call back over to Steve for his closing comments. Steve?

Thanks, Darren. To recap, we had a strong year, and we continued to make significant progress in returning Dine Brands to a growth company. While we've done a great deal of heavy lifting to get to this point, we still have a lot of work ahead of us. We have the right plans in place, and we're executing on a multipronged strategy that has produced positive results.

With the headwinds of 2017 behind us, we are in a significantly stronger position headed into 2019. We have a lot of compelling attributes, such as robust adjusted EBITDA margins and an attractive adjusted free cash flow profile due to our highly franchised model, which, and I will continue to repeat, our #1 priority is return of capital to shareholders.

Now we would be pleased to open up the call for questions. Operator?

(Operator Instructions) And our first question comes from Michael Gallo from CLK.

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

Yes. So I'll direct this mostly to John, but let me just head it off. Our view is, we are -- we have righted the ship. We have moved back into a very profitable area for our franchisees. We are very excited about the traffic growth that we've seen. We're excited about expanded opportunities, both in off-premise as well as returning to growth. We're looking at starting to add new units by, hopefully, the end of the year. We're starting to have conversations with our franchisees as we speak. And so what we've got is a robust brand, which is -- has been around for a while, but as you've seen our demographics, has high 40% and climbing, 34 and under customers in our restaurants. So not only do we think we've got a brand with a history that people love, and we've returned to its roots, which is what people wanted us to do, but we've also got a strong youth component to our demographics that leads to a very favorable long-term future. And we think we've got lots of opportunities to grow this brand, both domestically and internationally. On the domestic side, we expect to start seeing some real development. I just came back from a large franchisee investment conference out here in California, and the interest in our brand was remarkable. I got up at the end of the conference to speak, but 3 people from previous panels had already talked about Applebee's in such glowing terms, there was really nothing left for me to say. So we're pretty excited about that opportunity. John, why don't you fill in with a color.

Sure. Thanks, Steve. Michael, I think the -- let's call '17 a foundational year or transitional year, '18 was the return to relevance in growth, and it was critically important we demonstrate our ability to consistently and predictably generate results. We're in that position right now. And so as I look at the brand, I feel we have an extraordinarily unique partnership and business model with our franchisees. We have 32 partners. They are large operators with deep experience and significant know-how in the restaurant industry, in particular, casual dining. That partnership unlocks strategic opportunities. We had a healthy debate back in '17 and partially in '18. We've put a new team in place with exceptional leaders. Their partnership with franchisees works well. We meet on an every-other-month basis. We're now dealing, as we look at '19, with kind of a full deck. We closed our underperforming restaurants. We leverage with some really great insight our consumer teams. So we're occasion-based marketers. We take distinct occasions. We look at need states. We understand drivers and motivations, and we market accordingly. We're very selective and disciplined in our innovation, both on the culinary front and the beverage front. You'll continue to see that selectively from the team. Our off-premise business has 3 components. We are primarily focused on To Go, call it, 11-plus percent of our business today. It will get up to 20% or so over the next 3 years. But there are 2 other emerging components, catering and delivery. While secondary priorities at the moment, we've got a footprint of about 1,000, 1,100 restaurants who have activated delivery either internationally or locally, and catering remains very low-hanging fruit for a brand that is fundamentally a value- and variety-based brand. So we think we're positioned well. You add all that up with probably most significant business opportunity and that is restaurant excellence, and we're very well positioned. Our team under the leadership of Kevin Carroll and our franchisees have really made tremendous progress. The variability has narrowed, and our guests who are experiencing probably what they did experience from Applebee's in our heyday, a terrific 1 hour, 1.5-hour experience, and the To Go experience is equally satisfying. So you add all that, Mike, and we're well positioned in '19 and beyond, and we're candidly very excited about our future.

Our next question comes from Brian Vaccaro from Raymond James.

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

Yes. Brian, include in that both national providers, where we have a formal contract as well as local providers. We have a handful of local providers as well. But yes, I anticipate eventually getting up to 1,500 units there from a delivery perspective.

Okay. That's great. And circling back to the improvements that you've made at Applebee's to the in-restaurant experience, can you provide a little more color on where you've seen the most improvement in the last 3 to 6 months and where you see opportunities for further improvement into '19?

From a restaurant operations perspective, Brian?

Yes.

Number one would be variability, meaning, when I stepped in, in '17, the variability between our bottom performers and our top performers was large. And so that's been tightened dramatically. Our percentage of guests experiencing a problem, which we quantify on a daily basis, has moved dramatically south to the point where it's at about 4%, which is a very low defect rate, if you will. And then we placed a significant premium on guest satisfaction and value for the money. And those are 2 that are both very strongly correlated. Our accelerated performance is tightly correlated to overall comp sales improvements. And frankly, we have very tough standards. We hold our franchisees accountable. And interestingly, they want to be held accountable. They applauded the actions that we've taken over the past 2 years to encourage underperforming units and underperforming operators to exit the system. And so those are a few highlights, and that's where we're focused operationally. And I would also add that we're pleased with the unit economic progress in the individual restaurant profitability. Both brands have a restaurant profitability improvement initiative underway. We captured substantial savings in '18, anticipate doing so in '19 and '20 probably on a perpetual basis.

All right. That's great. And then just one, if I could, Tom. Looking through the 10-K a little bit question, just a numbers question. On the Applebee's franchise segment, you obviously put the annual numbers in sort of back into the fourth quarter. Just had 2 questions. On the Applebee's franchise revenue, I wanted to just confirm that, that -- I think it was around $49 million, if my footing is right. That includes that $6 million of collection of past 2 royalties within that $49 million, if you could confirm that. And then on the expense side, it looks like it was in the mid-$4 million range on franchise expense. Can you walk through the puts and takes? I think bad debt expense was down. But just walk through the puts and takes of that franchise expense front in Q4, please.

Tom, why don't you start with the...

Yes. Sure. So on the -- on Applebee's franchise segment revenue, you're right, it does include the collection at the end of the year. So hopefully, that answers that question. With respect to expenses, just -- again, are you speaking specifically to Applebee's franchise segment? So you're -- can you clarify that?

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

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

Okay. All right. And I guess, if you think about '19, the Applebee's franchise segment profitability, it seems the message is, we'll see a normal -- "normal" royalty collection rate going forward and bad debt -- I'm sorry, the franchise expense line. We should expect something -- a normal run rate of something a couple million bucks a quarter going forward, sort of, the volatility dampens going forward?

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

Our next question comes from Nick Setyan from Wedbush Securities.

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

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

You mentioned the trajectory a bit there. Even the low end of the comp guidance implies a significant uptick in 2-year trends, which we have already been seeing. And so I mean, there is the current trajectory at least in terms of what you've seen in Q1 kind of indicate that we will continue to see this acceleration on a 2-year basis.

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

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

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

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

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

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

Perfect. On the unit growth at Applebee's, is it still first half we should get sort of Q1, Q2 something like 20-plus closures? And then in the back half, I guess, that implies positive net unit growth in the second half of '19 at Applebee's?

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

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

Yes. So we, obviously, monitor that closely, and we're very focused on their profitability. But I think the way to think about it is, at an average unit volume of about 2.5, the profitability can vary, obviously, from where they're operating labor costs and all this. The interesting thing, though, is we believe, and our franchisees are proving this out, that we're actually -- even in the face of fairly steep labor cost increases, we're seeing in most cases margin improvement, and that's because of the changes our franchisees are making in their ops model as well as a lot of the work that we're doing with them in the kitchen. We're actually expecting our product cost to decline slightly this year, which will be a real boost for us. We've talked before about we've done an internal study and now made it permanent in terms of looking at ways to reduce cost and improve operations, both in the kitchen and in front of the house that are bearing fruit. We think that could be worth, over the next several years, up to 300 basis points in potential profitability improvement. And we're going to need that to offset labor costs at this point because the markets, obviously, are tight. As we talk about here, we do represent the 99%. So it's a 2-edged sword for us. Those people going back to work are our customers. So there is benefit as well as cost and the higher labor pressure and that, obviously, is exacerbated in some markets versus some others. But we think, in general, where they are now is getting close to where they were in '16, which is it can range on an average unit volume, as I mentioned, at 2.5, it's -- you're in the double digits, and it can range into the high-teens depending on how intense the revenues are.

And that's after royalties after the ad fund contribution?

Yes, yes.

Our next question comes from Stephen Anderson from Maxim Group.

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

Tom?

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

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

Okay. And my follow-up question is you talked about the third concept on this call, but I don't see if you've had any progress with that and if you've discussed this with any of your franchisees.

I'm sorry, can you repeat the question?

Third restaurant concept.

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

Our next question comes from Brian Vaccaro with Raymond James.

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

That is burdened.

We'd like to say enhanced rather than burdened.

Value add.

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

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

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.