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Edited Transcript of DIN earnings conference call or presentation 2-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 DineEquity Inc Earnings Call

GLENDALE May 10, 2017 (Thomson StreetEvents) -- Edited Transcript of DineEquity Inc earnings conference call or presentation Tuesday, May 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren M. Rebelez

DineEquity, Inc. - President of IHOP Business Unit

* Greggory H. Kalvin

DineEquity, Inc. - Interim CFO, SVP and Corporate Controller

* John C. Cywinski

DineEquity, Inc. - President of Applebee's

* Ken Diptee

DineEquity, Inc. - Executive Director of IR

* Richard J. Dahl

DineEquity, Inc. - Chairman and Interim CEO

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Conference Call Participants

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* Brian Michael Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* Christopher Thomas O'Cull

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Michael W. Gallo

CL King & Associates, Inc., Research Division - MD and Director of Research

* Stephen Anderson

Maxim Group LLC, Research Division - SVP and Senior Restaurant and Consumer Analyst

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Presentation

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Operator [1]

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Welcome to the First 2017 -- First Quarter 2017 DineEquity Earnings Conference Call. My name is Hilda, and I will be our operator for today. (Operator Instructions) Please also note that this conference is being recorded.

I will now like to turn the call over to Mr. Ken Diptee, Executive Director of Investor Relations. Sir, you may begin.

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Ken Diptee, DineEquity, Inc. - Executive Director of IR [2]

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Good morning, and welcome to DineEquity's First Quarter 2017 Conference Call. I'm joined by Richard Dahl, Chairman and Interim CEO; Gregg Kalvin, Interim CFO and Corporate Controller; Darren Rebelez, President of IHOP; and John Cywinski, President of Applebee's.

Before I turn the call over to Richard, 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 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 made 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 IR website.

I will now turn the call over to Richard. Richard?

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [3]

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Thank you, Ken, and good morning, everyone. Certainly important to today, our brand presidents are with us to discuss trends in their respective dining sectors, initiatives and progress at our brands in particular, and why our guidance for the year remains unchanged.

No effort is being spared to maximize the growth potential of our 2 brands. While the casual dining and family dining sectors face challenges, which have carried over from year-end 2016, we believe a good deal can be done at each brands to significantly improve performance.

As I indicated on my first call with you about 60 days ago, my role as Interim CEO is not one of a caretaker. I've been deeply involved in the development of the go-forward strategy for Applebee's. Following a review by Bain Consulting, we have completed a comprehensive analysis of both the underlying and brand-specific events that have led to a decline in sales.

Over the last 2 months, the stabilization work for the Applebee's business has begun and has progressed. We are now executing on several strategic initiatives, with close franchisee collaboration to stabilize and improve the performance of Applebee's.

Bain participation will conclude by the end of June, and we believe we will begin to see the fruits of this effort by the end of 2017.

Also as discussed in our last call, we are proactively addressing franchisee financial health through various initiatives. This continues to be a collaborative effort by DineEquity; our adviser, Trinity Capital; and the Applebee's Franchise Business Council.

Today, most of this effort has been focused on restaurant closures, with 19 Applebee's restaurants closed as of March 31.

Overall, we currently believe we will be within our guidance range. But most likely, near the higher end of that range. We will, of course, update you as the year progresses.

Additionally, franchisee financial assistance will be determined on a case-by-case basis. As we said in our last call, assistance could take several forms depending on the situation and could include loans and other support program.

I would like to highlight, as I did last quarter, that not all franchisees are in the same position. And we are, again, evaluating each case individually.

Of course, an important part of stabilizing Applebee's is a new president. As we announced in March, John Cywinsk has been selected to lead this iconic brand and has jumped right in.

John has a great background for the position and a solid history with Applebee's as its CMO from 2001 to 2006. In addition to John's extensive background in advertising and marketing and with Applebee's, he was also former President of KFC's U.S. business. He's been a franchisee with a few other brands, and most recently served as the Executive Vice President of Strategic Innovation and Marketing at Brinker. John is a great addition to our team and you will hear from him shortly.

To facilitate both brands' upfront menu innovation, we have recently opened a state-of-the-art culinary center located at the Restaurant Support Center here in Glendale, where we will be -- where we can more rapidly create and preliminarily test our food offering and build a more robust pipeline of innovative menu items. John will discuss these and many other matters in a few minutes.

While a lot of work is being done at Applebee's, IHOP also has numerous initiatives underway, particularly in the areas of value messaging, technology innovation and growing its to-go sale. Darren will fill you in on this again shortly.

We have also undertaken initiatives at DineEquity to further empower both brands by more directly aligning specific resources in both manpower and capital with the brands. This is a strategic and thoughtful move to optimize our shared services model and to address the unique needs of each brand.

The goal here is to promote more responsibility and accountability at the brand level. As such, functions like strategic operations, restaurant development, training and certain other consumer-facing activities have been, and will continue to be, reassigned to the brands. This is purely about power and efficiency of both brands.

Our primary focus is on the core health of these 2 large brands, which combined, serve an average of approximately 1.5 million guests each day.

Lastly, with the Applebee's president position filled, the board will place a greater focus on the selection of a permanent CEO and CFO.

Before the call is turned over to both Darren and John, let me first ask Gregg to address the pertinent financial highlights for the quarter. Gregg?

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Greggory H. Kalvin, DineEquity, Inc. - Interim CFO, SVP and Corporate Controller [4]

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Thank you, Richard. Good morning, everyone. I'll take a few minutes to discuss our financial performance for the first quarter, starting with our income statement.

For the first quarter of 2017, adjusted earnings per share was $1.22 compared to $1.58 for the same period of 2016. The variance was mainly due to lower gross profit as well as an increased in G&A expenses. The decline in gross profit was primarily driven by a 7.9% decline in Applebee's comp sales and additional reserves for bad debt related to the sales decline.

The G&A increase reflects approximately $3 million incurred in the quarter for the Applebee's stabilization initiatives we discussed on our March 1 earnings call. The impact of these declines on adjusted EPS was partially offset by lower income tax expense and fewer diluted shares outstanding.

Regarding G&A expenses, the increase in G&A for the first quarter of 2017 compared to a year ago was primarily due to higher personnel-related costs and investments related to the Applebee's stabilization initiatives. The increase in personnel-related cost was due to an approximately $9 million of nonrecurring cash severance and equity compensation charges related to the separation of our previous Chief Executive Officer. The cost related to the Applebee's stabilization initiatives were approximately $3 million in the first quarter.

As a reminder, the nonrecurring cash severance and equity compensation costs were added back in the calculation of adjusted earnings per share for the first quarter of 2017. The costs related to Applebee's stabilization initiatives are not added back in the calculation of adjusted earnings per share for the quarter or the whole year.

Regarding the Applebee's stabilization initiatives, we now expect these to total approximately $7 million over the first 2 quarters of 2017, with the remaining $3 million to be incurred in the second half of the year. Lastly, we anticipate that a substantial amount of similar costs will not occur in 2018.

Turning to our tax rate. Our effective tax rate for the first quarter of 2017 was approximately 41% compared to 38% in the prior year's first quarter. The increase was due to the adoption of new accounting guidance that address the treatment of certain aspects of share-based payments.

This change from prior year has now required that all tax effects related to share-based payment be recorded at settlement or expiration through the tax provision on the income statement compared to previously being recorded in the equity section of the balance sheet. The higher Q1 2017 impact on our rate was considered in our full year 2017 tax rate guidance, which is approximately 38%.

Now let's turn briefly to the cash flow statement. Cash flows from operating activities for the first quarter were approximately $20 million compared to $38 million for the same quarter in the prior year. The overall decrease in cash from operations was primarily due to lower net income resulting from higher G&A expenses and the decline in gross profit from franchise operations. The higher G&A was related to the nonrecurring cash severance payments and Apple Applebee's stabilization initiatives discussed earlier. The decline in gross profit was related to the same-restaurant sales decline at both brands.

Additionally, net changes in working capital used cash of approximately $5 million in the first quarter of 2017 compared to providing cash of approximately $1 million in the same quarter last year.

Adjusted free cash flow for the quarter was approximately $19 million compared to approximately $39 million in the first quarter of 2016. The decline was due to lower cash from operations, as previously discussed, and higher capital expenditures compared to the first quarter of 2016. The increase in capital expenditures was mainly due to final culinary-related construction costs at our corporate headquarters.

To conclude, we are executing against our strategies at both brands. And while we are committed to investing in growth initiatives to drive sustained positive sales and traffic, we will continue to closely manage our G&A expenses.

With that, I'll turn the call over to Darren to discuss the IHOP brand.

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Darren M. Rebelez, DineEquity, Inc. - President of IHOP Business Unit [5]

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Thank you, Gregg, and good morning to all of you.

IHOP essentially performed in line with the family dining category in the first quarter, according to Black Box data. While we're clearly not satisfied with the 1.7% decline in first quarter comp sales, we attribute much of it to holiday shifts, and remain confident about our go-forward performance.

To recap the quarter, January delivered a strong increase in comp sales, driven by a promotional shift to our compelling value offering, All You Can Eat Pancakes.

The offering of our core equity like our pancake, combined with a value proposition, was supported by a recently optimized frequency-driven media plan to attract core IHOP guests as well as occasional guests, and it worked well.

For the balance of the quarter, IHOP's performance reflected a series of holiday mismatches, which adversely impacted sales results and a delay in tax refund, which resulted in slowed consumer spending.

We're confident in our strategy, and significant work is underway to drive sales and consumer reach through culinary innovation as well as creating new ways for our guests to access the brand however, whenever and wherever they want it.

First, we're focused on giving our guests even more reasons to visit IHOP any time of the day and any day of the week. To that end, and as a part of our core strategic positioning, we've accelerated our pipeline testing of new and original breakfast items, and specialty dishes that can be enjoyed during any day part and found only at IHOP.

We're executing on a strategy to drive traffic during the lunch and dinner day parts with new and relevant menu items. In fact, we started testing a new dinner menu in select regions to create awareness and more credibility around our lunch and dinner offerings while leveraging value in customization.

We're also testing several initiatives to expand consumer channels, which we believe will provide an entirely new stream of incremental revenue for our franchisees' restaurants. Our focused effort in this area includes our IHOP N' Go initiative, which targets growing off-premise sales. Consumers are increasingly seeking time savings and flexibility while still being able to enjoy the food they love on-the-go.

Today, more than 50% of Americans order food to-go at least once a week, and 90% of Americans order food to-go at least once a month.

IHOP's to-go sales currently account for roughly 5% of total sales, well below the family dining average of 10%. Expanding our to-go business represents an opportunity to capitalize on this growing industry trend and a great way to increase our revenue base.

We've worked closely with franchisees and operators to test various aspects of our to-go program. This includes the performance of our proprietary and innovative new packaging, which ensures that the same great IHOP food that's enjoyed in our restaurants will be just as delicious when taken off-premise. We've also tested using targeted pancake revolution e-mails to entice local restaurant guests to order online and pick up their food to-go.

To further build on our IHOP to-go platform, we're also beta testing online ordering, which allows guests the added convenience of placing orders from their computers or mobile devices. Based on early results, the restaurants beta testing online ordering, even without robust marketing and advertising support, have seen a significant increase in average check. We've received good input and support from our franchisees on the to-go program and online ordering beta tests and we're on track to roll this platform out system-wide during the second quarter.

The brand and our franchisees are not just behind improving the guest experience outside the restaurant, but just as importantly inside the restaurant. To that end, our Rise N' Shine remodel program continue to move forward in the first quarter, with 53 remodels completed. We are, again, targeting a total of 300 completions by the end of the year, all-in reflecting investments of $38 million in 2017 and a total of $75 million since we kicked off the program last year. In addition to these investments in existing restaurants, our franchisees opened 11 new restaurants in the quarter.

Another part of improving the guest experience is meeting our guests' needs for convenience. We believe that this can be accomplished through technology, both back-of-house and consumer facing. To achieve this, we're testing technology, which will simplify the single order entry process, improving the speed and accuracy with which guests' orders are communicated to the kitchen and processed. Additionally, we're fast tracking development of an IHOP mobile app as well as limited tests for delivery.

Lastly, I would like to say a huge thank you to our team members and our franchisees for pulling off another very successful National Pancake Day, which required a tremendous effort from everyone involved. And I'm thrilled to announce that thanks to all of you and the amazing gratitude of our IHOP guests globally, we raised an incredible $3.9 million for the Children's Miracle Network hospitals, Shriners Hospital for Children and The Leukemia & Lymphoma Society. This greatly exceeded our fundraising goal of $3.5 million.

This year's National Pancake Day was also successful from a messaging perspective, resulting in our best year in terms of traditional media coverage and social media engagement. To provide a few highlights, we had over 750 million social media impressions and over 115,000 total mentions of IHOP for National Pancake Day on our social media channels, a 20% increase over last year.

To wrap up, I'm confident that our strategy will propel IHOP's momentum. We're taking the right steps to drive sustainable positive sales and traffic, expand IHOP's appeal across day parts and create additional channels to access the brand.

With that, I'll turn the call over to John for a discussion on Applebee's. John?

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [6]

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Thanks, Darren, and good morning, everyone. I've had the pleasure of working with many of you over the years and I look forward to reestablishing those relationships as well as building new ones with those I have yet to meet.

I've been on board now just shy of 2 months, and I'm confident we have the strategy and resources in place to turn around Applebee's.

Now I used those words thoughtfully and intentionally, because this is clearly a brand turnaround from my perspective. Simply stated, my job is to challenge the status quo and provide leadership required to unlock the growth embedded in this great Applebee's brand.

Now I've done this before, and I'm not naive. I know this brand and category intimately. While the category has certainly been challenged, I believe that much of Applebee's recent underperformance has been somewhat self-inflicted. Of course, it's relatively easy to assess these things with the benefit of hindsight. Stopping the sales erosion that we've experienced over the past several quarters and reestablishing growth will require intense guest focus, discipline, accountability and very heavy lifting over the next 12 to 24 months. Most importantly, this will require a deep and genuine partnership with our franchisees, the folks who truly built this brand.

We have 33 smart, talented and very passionate franchisees in the U.S., who have more than 1,800 restaurants. I know, trust and respect these partners, and I believe they trust and respect me as well.

Once we're aligned and focused, I'm confident we'll achieve our goals of enhanced relevance and sustained growth. Again, not easy and not overnight, but certainly realistic and achievable.

As Richard outlined upfront, we've invested quite heavily and we've done our homework. We now have the benefit of an extensive Bain assessment of every component of our business. The work is insightful, brutally honest and actionable. It's provided a clear view as to our strengths as well as our opportunities.

Importantly, our franchisees were involved in every single aspect of the assessment as well as the development of the action plan. And Bain will remain with us through June as we begin to implement our turnaround plan in conjunction with our franchise partners and brand teams.

Bottom line, there are no sacred cows here. And we're prepared to do what's necessary to ensure Applebee's success. Frankly, I wouldn't have come on board otherwise. As with any sound plan, this one begins with a clear understanding of the core Applebee's guests. This understanding is comprehensive around occasions, need states, drivers of behaviors, the demographics and, of course, brand perceptions. From this, we've developed a strategy where Applebee's can differentiate with credibility and win in this highly competitive grill-and-bar space.

We are wonderfully approachable, accessible, affordable and downright neighborly brand. Always have been. While not sexy, our plan involves Applebee's getting back to its roots, our so-called DNA, who we are and what we stand for in the eyes of our guests. This also entails meaningful structural changes already underway as well as an elevated focus, importantly, on restaurant execution and guest satisfaction.

Tactically speaking, we know where to focus. Our testing discipline, culinary pipeline, value orientation, bar business, to-go platform and then our marketing and media advertising plans all require significant evolution. I'm personally involved with each of these priorities, along with our internal teams, agency partners and, of course, in close partnership with our franchisees.

Without question, this is a multidimensional business challenge, so prioritization here is essential. While this work is underway and we're operating with a very keen sense of urgency, I don't expect to see the benefit of this focus until the latter part of 2017 at the very earliest.

Regarding franchisee financial health, we are assessing our franchisee portfolio in conjunction with Trinity Capital and may consider providing financial assistance, where warranted.

As we outlined last quarter, this process will likely result in the closure of approximately 40 to 60 underperforming restaurants this year, all in the interest of brand health. We'll certainly keep you posted as these fluid discussions unfold.

Now that's as much detail as I prefer to share today for obvious reasons, although I'm happy to provide more color as we progress in upcoming quarters. Our vision is clear, our alignment is strong and my belief in our franchisees is unwavering.

But the Applebee's brand turnaround is a long-term proposition, and I realistically look at 2017 as very much a foundational and transitional year. I'm confident we'll reestablish credibility through our actions and results one step, one quarter at a time.

With that, I'll turn it back to Richard for his closing comments.

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [7]

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Thanks, John, and welcome aboard. While these are challenging times, we remain steadfast and optimistic not only about the relevance of our brands, but the sectors in which we operate.

As we focus on the health of our 2 brands, continuing to grow the international presence remains a core part of our growth strategy. Clearly, this is a time to invest in our brands, people and franchisee.

The largest asset we have is not on our balance sheet, it's our team members and our franchisees. I wish to thank them both for their energy and collaborative efforts to strengthen and grow our business.

And now we would be pleased to answer your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Michael Gallo from CL King.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD and Director of Research [2]

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One question and one follow-up. I guess this question is probably more for John, but also for Richard. Now that you've had the benefit of the brand diagnostic, John, you've been there 60 days and obviously, you knew what was working well when you were at the brand the last time. You mentioned the problems were mostly self-inflicted at Applebee's. I was wondering if you could speak to the 2 or 3 things that you think sort of went the most wrong and how you kind of envision getting this brand back to where it was historically. And then I have a follow-up.

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [3]

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Sure, Michael. Thank you. The -- it's very apparent to me and I think to all of us that the brand has had a few missteps over the past 18 months. One of those is drifting from our core Applebee's guest, which is very much middle America, middle income. There was an attempt to kind of reposition the brand in a somewhat aspirational manner around the modern bar and grill, and in the process, it's very clear from the data that we may have alienated some core guests in the process. That's number one. Number two, this is a brand that's always, always had a strong heritage around value. We are an affordable indulgence, plain and simple, and a pretty accessible and approachable one. And candidly, I think we've taken our eye off our core value proposition over time. And then the third one, you asked for 3, I'd say there's a lot of variability today across 1,800-plus restaurants in terms of how we satisfy our guests. So we have some exceptional partners and some outstanding restaurant results, but the other end of that spectrum, we also have too much variability. So tightening -- while we improve our value proposition, while we get back to our core guests, we need to tighten up our variability around operations and guest satisfaction. We see very strong correlation between restaurant volume and comp sales performance and our internal operations metrics. And so that is an enormous priority for us internally. Perhaps our #1 priority at the moment.

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [4]

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I think -- Richard here. John nailed that very well. And the work that we've done with Bain in this diagnostic has been shared, not only widely within the organization, but with the franchisee group as a whole also. So the facts of what was done is not in dispute. Where we go from here, I think we can put the past behind us and say learning experience, get away, get back to the core and work more collaboratively together.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD and Director of Research [5]

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Okay. That's very helpful insight -- data. The follow-up question was just regarding -- for Gregg, I guess. How much was the increase in reserves? Is that included in the $10 million? And do you expect any more of that or you think you're pretty much covered for the year?

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Greggory H. Kalvin, DineEquity, Inc. - Interim CFO, SVP and Corporate Controller [6]

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Excluded from the $10 million, that's separate. About $2 million for the quarter, what we added in the reserve area.

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Operator [7]

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Our next question comes from Brian Vaccaro from Raymond James.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [8]

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Just a few questions, if I could, on the state of the Applebee's franchise system. And as you've had more time to drill down on their financials and work with them to improve profitability, can you share where store level cash flow margin is for the average or median store in the system after royalties? And then maybe talk about where some of the more significant opportunities are to improve profitability, specifically, that have been identified at this point?

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Greggory H. Kalvin, DineEquity, Inc. - Interim CFO, SVP and Corporate Controller [9]

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This is Gregg. I'll start it off and then ask John to comment further on operational areas. We don't share franchisee by franchisee information like that or a look at the system, Brian. But we are looking closely at all franchisees on a case-by-case basis. And we are assessing where our assistance could be valuable. And that's the way we're approaching it right now. And this process is ongoing, as we mentioned, with Trinity and we will continue to update as we progress along here. John?

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [10]

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Yes, Brian, I think the -- this is obviously a revenue game. So in terms of store level margins, we're looking for sustained growth here and even moving the business back to kind of a flattish performance will dramatically enhance store level unit economics. We have tremendous supply chain leverage, which is a core point of difference for this systems business. And then I would say there are portions of this menu, where we believe we can win with credibility, and we'll invest there. And there are other portions of the menu, where we think we can compete effectively, but we're not seeking to be best-in-class. And so having a tighter menu strategy and adopting that and investing strategically, but not everywhere, is part of that margin-enhancement program. And I feel good about where we are, with the one caveat being we're revenue challenged, and that creates cash flow issues for our franchisees.

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [11]

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Richard here. The diagnostic, and not delving into each franchisees' individual financial condition or financial statement, the franchisees now have a very solid document in which they can compare themselves to their peers in total and match up things like margin, food costs, labor costs, rental costs for the site and so on. I think this will prove invaluable going forward as they manage themselves. Now clearly, different parts of the country have totally different parts, different cost structures and so on, but this has also been structured geographically, so a great tool for them and, frankly, for us to move forward to identify these things in a more rapid manner.

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [12]

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Yes, Brian. This is John. To piggyback on that point, the franchisees have been flying a bit blind in terms of relative context as to their P&Ls. And at this point, that benchmarking has been a significant benefit to them, that we shared recently. It allows them to understand where they stand relative to their peers within their geography. And it's cut a number of different ways in terms of variables, so it's a big enabler within our system. It shines a spotlight on opportunity. And of course, it only benefits us if our franchisees take advantage of it, and they are.

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Operator [13]

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The next question comes from John Ivankoe from JPMorgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [14]

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A couple of questions, if I may. First, just on overall bar and grill category. It's said in the industry that bar and grill has gotten relatively expensive for their core customers, so I just wanted to get your thought on that, whether lowering the average ticket is kind of a necessary path to drive traffic over the next couple of years? And then finally, John, as you've been involved in the marketplace a long time, have independents in fast casual really changed in terms of their competitive impact in bar and grill over the past couple of years? And if so, what can you do to kind of change what looks to be from the outside, a fairly powerful tide?

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [15]

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John, we -- as I look at our average check, we just need to be thoughtful there within the category. The -- our guest is -- when you look at our guests, very simplistically, a large percentage would be very value-oriented. You could call them, value seekers, where price is important. And that segment of our guest tends to look for the best deal. They are very price- and value-oriented. And so that factors into our decision-making every time out. There's another segment of our guest portfolio that's a little less value-oriented or price-oriented. They're very much what we would call traditionalists or creatures of habit. They don't stray too far. They're loyal. They don't category switch as much as the value seeker. And they're both pretty comparable in terms of percentage of our -- of the population and percentage of our dollars, the dollar revenue. So there are healthy ways, in my opinion, to drive check through add-ons and bar and desserts and apps and things of that nature. And then there are unhealthy ways to do it. And I think there's probably been too much reliance upon driving business through check. You see a pretty strong inverse correlation between check movement and traffic declines in the category over time. And then to your second question, looking at fast casual, yes, I think guests, in general, over the past decade, have been more exposed to different types of food, higher quality food, different service mode, and it has -- and I would also throw in, C stores and grocery, home meal replacement, certainly weekday dinner as places or categories that have represented some intrusion on this particular category's performance. So I'm not sure if I'm answering your question regarding fast casual. And I wouldn't have a view to independents at the moment other than they are still large in terms of market share. They have an impact. They have authenticity and neighborhood roots that guests value. And I don't see that particular segment of casual dining disappearing anytime soon. They're viable, although they certainly in tough economic times don't have the resource to sustain a market share battle, so you see a lot of turnover in that particular segment.

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Operator [16]

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The next question comes from Chris O'Cull from KeyBanc.

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Christopher Thomas O'Cull, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [17]

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I guess first, Gregg, what is the allowance for (inaudible) accounts as a percentage of the receivables right now?

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Greggory H. Kalvin, DineEquity, Inc. - Interim CFO, SVP and Corporate Controller [18]

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Well, we don't -- it's more as a percentage of receivables. We look at it the revenue percentage items, is how we look at it quarterly, if you will. So if you take that roughly $2 million, it looks half about 4% for the quarter, and that's how we're looking at it right now.

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Christopher Thomas O'Cull, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [19]

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Okay. Okay. And then, Richard, how did the company determine the number of closures you're projecting for '17?

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [20]

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Actually the -- good question. I mean, there is some historical reference here that can be used, and last year we closed, Gregg?

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Greggory H. Kalvin, DineEquity, Inc. - Interim CFO, SVP and Corporate Controller [21]

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46, 47.

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [22]

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46, 47, expectation that, that would probably be the low end as we move into this, as we saw some of the diagnostic work come back from Trinity as to franchisee health and store-by-store modeling and taking a look at which ones of those had negative EBITDA or borderline EBITDA and came up with that number. Originally, for the guidance level. So quite a bit of fact and circumstance behind that.

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [23]

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Some of those numbers, Chris, are restaurants that simply have very poor unit economics and don't perform financially. Some of those are restaurants that may have initially been built in a vibrant trade area and that trade area has moved over time. And they are now stuck, if you will, in the wrong part of town. And so it's either a relo or closure. And then so we probably have a combination of both of those.

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Christopher Thomas O'Cull, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [24]

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Restaurant closures or typically lease expirations? I'm trying to understand is lease expiration, is that typically a catalyst for closures? I mean -- are a lot of those just situations where the lease has expired and they're not renewed?

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [25]

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All of the above, at least expiration is probably more common on the IHOP side. Right now I think, on the Applebee's side, it's the economics of the unit more than the lease itself. And sometimes, those economics on the Applebee's side are driven by high lease costs in areas where traffic no longer exists and so on and so. Certainly, a lease cost may drive economics. We're not be seeing lease expirations on the Applebee's side as driving a closure per se. But on the IHOP side, Darren tend to see this.

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Darren M. Rebelez, DineEquity, Inc. - President of IHOP Business Unit [26]

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Yes, this is Darren. On the IHOP side, we historically have closed between 10 and 20 restaurants a year and that's virtually all driven by lease expirations. And in some cases, we could have exercised the options, but to John's point earlier, the trade area might have left us and we've elected not to do that and to move on to a better trade area.

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Christopher Thomas O'Cull, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [27]

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I know a lot of the Applebee's franchisees when they were acquiring stores as part of the re-franchising program financed a lot of those acquisitions through sale-leaseback transactions. And I'm trying to understand how the company could possibly help franchisees that are really unable to close an Applebee's restaurant because of these lease arrangements? Have you guys kind of worked through that scenario?

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [28]

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Go ahead, John.

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [29]

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Chris, the -- to be quite frank, we wouldn't allow a lease term to get in the way of unnecessary closure, right? These things can be negotiated. We've done so successfully. Our franchisees have done so successfully. It's certainly easier to exit a restaurant at the termination or the closure of a term. However, we have many examples where we've successfully exited prior to lease termination. So it's a variable. There are multiple variables in that. And the financial assistance is related to our willingness and ability to permit the closure. And what that means in terms of future royalty strength, our ability to successfully assist in a lease exit negotiation, termination. Some of these terms around the systems involve partnership with banks. And they have a terrific partnership with many of the lenders across the system. And between us and bank and the landlord and the franchisee, we find our way to a better financial circumstance. And so what Richard referenced as financial health, those are kind of the 3 or 4 components that all would play simultaneously.

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [30]

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And as it relates to the leases themselves, as part of our financial support work that we are doing with the franchisee, we are retaining folks to renegotiate leases that have gotten so pricier, so large part of a franchisee's earnings statement that the landlord is earning more than anybody else. So there is an ongoing effort there. Directly, we can assist through, especially for -- in that lease, we can help them with subsidizations to get out of those leases, if that makes economic sense. So again, that's why this is a case-by-case basis. Nobody and almost no store is exactly the same, given the variety of geographic location and so on. But there aren't that many franchisees, who can, and there aren't that many stores that you can't figure this out.

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [31]

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And I think the final point, Chris, is we would view opportunistic and strategic evolution of this portfolio, closures as kind of annual part of doing business, right? Not to the extent that we're looking at it now, but any wise management of a portfolio like this requires selective closures on occasion. And we'll continue to look at that moving forward.

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Operator [32]

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The next question comes from Steve Anderson from Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - SVP and Senior Restaurant and Consumer Analyst [33]

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Just a couple of -- I do have a couple of questions First, from the Applebee' review, has it revealed to you what exactly is working? Certainly, the value platforms have worked well over the years. I want to see if those still work for you? And I have a follow-up question on IHOP.

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John C. Cywinski, DineEquity, Inc. - President of Applebee's [34]

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So what is working is there's a tremendous affinity. Our guests have tremendous affinity for this brand. They want the brand to succeed, they want it to win. There's a genuine emotional connection there. I'd say candidly, probably a little acknowledgment that, "Hey, Applebee's, you've slipped a little or drifted a bit." And so how we are perceived across America, certainly within our core demographic is a strength. Our value proposition, at least perceptions around value for the money remains strong. Not as strong, frankly, as I'd like to see them, but still a core component of our business and a point of differentiation. I would tell you this isn't consumer work, but our business model and having 33 franchise partners, all of whom have sizable organizations with strategic and financial capability, is unique. It's a point of difference. I've been with other brands, where that franchise portfolio would be 500,000 -- well north of 1,000 franchise partners. We, in any given point in time, can gather those 33 folks in a room, align and implement a decision. And you'll see more of that moving forward. We'll be a little bit more nimble as we progress here in our plans. And the other thing I'd say, having been part of franchise or franchisee relationships for quite some time, there is a complete alignment here. There's no defensiveness, there are no sacred car -- cows in terms of our action plan. When you look at a mirror, it's tough, and our franchisees are a proud bunch, but we are completely aligned with them and vice versa around where we have gaps and opportunities and we are partnering with them to put those plans in place. So some fundamental core strengths of the brand. And then I guess the final point would be, it's early. I'd be lying to you if I were to suggest that we have a lot working at the moment, right? Our revenue for the quarter is down substantially. I do expect a sequential improvement in that, but it's too early to identify results that we can point to as part of this turnaround plan. But I do anticipate more color there in subsequent quarters, especially as we get to the end of the year.

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Stephen Anderson, Maxim Group LLC, Research Division - SVP and Senior Restaurant and Consumer Analyst [35]

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And you mentioned some of the calendar shifts that occurred. Looking at second quarter, I'm just -- Darren was speaking to a quarter specifically, but historically, when Easter is falling in a given quarter, has that helped you and by how much historically?

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Darren M. Rebelez, DineEquity, Inc. - President of IHOP Business Unit [36]

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Yes, this is -- yes, the Easter holiday has tended to help us by maybe 40 or 50 basis points when -- go from one quarter to the next. And what we saw this year was the holiday shift into the second quarter also resulted in a scattering of spring break timing across the board. So we expect that all that will normalize through the second quarter. But at this point, that's what has impacted the first quarter.

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Operator [37]

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(Operator Instructions) At this moment, we show no further questions. For closing remarks, I would like to turn the call back over to Mr. Richard Dahl, Chairman and CEO.

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Richard J. Dahl, DineEquity, Inc. - Chairman and Interim CEO [38]

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Okay. Thank you again for joining us on the call today. We are scheduled to report the results of the second quarter on August 2, and we certainly look forward to speaking with you at that time. But again, anytime you have questions, please do give us a call. Thanks for your time today.

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Operator [39]

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Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.