Ken Diptee - Executive Director of Investor Relations Julia A. Stewart - Chairman, Chief Executive Officer and Interim President of Ihop Business Unit Thomas W. Emrey - Chief Financial Officer.

John W. Ivankoe - JP Morgan Chase & Co, Research Division Bryan C. Elliott - Raymond James & Associates, Inc., Research Division Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division Alton K. Stump - Longbow Research LLC Peter Saleh - Telsey Advisory Group LLC Michael W.

Gallo - CL King & Associates, Inc., Research Division.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 DineEquity, Inc. Earnings Conference Call. My name is Ellen, and I will be your conference operator for today. As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr.

Ken Diptee, Executive Director of Investor Relations. Please go ahead, sir..

Thank you. Good morning, and welcome to DineEquity's Second Quarter 2014 Conference Call. This morning, I'm joined by Julia Stewart, Chairman and CEO; Tom Emrey, CFO; and Gregg Kalvin, Corp. Controller. Before I turn the call over to Julia and Tom, let me remind you of 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 and the contents of these factors, which are detailed in today's press releases, as well as in our most recent 10-Q filing. The forward-looking statements made today are as of today, and assumes no obligation to update or supplement these statements.

We may also refer to certain non-GAAP financial measures, which are described in our press release and also obtained on DineEquity's Investor Relations website.

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

First, enhance our value proposition to attract best-in-class international franchisees; and second, create a long term, sustainable international growth engines by opening the right restaurant in the right places with the absolute best franchisees.

We are pleased with our progress to date, and we'll provide a comprehensive update on our October 28 third quarter earnings conference call.

We've also continued to advance our shared services platform, which allows our 2 brands to focus on key factors that drive the business, while leveraging the resources and expertise of our scalable support structure. We believe this is a significant competitive advantage.

We will continue to make strides on foundational improvements and brand innovation by leveraging our shared services platform. And with that, I'll turn the call over to Tom to discuss the second quarter financial highlights.

Tom?.

Thanks, Julia, and good morning, everyone. I'll first walk you through the income statement highlights, and then make a few comments on the balance sheet and our free cash flow. Let me start by saying that we're very pleased that both Applebee's and IHOP reported positive second quarter sales compared to the same period of 2013.

It was another solid quarter, as adjusted earnings per diluted share grew by 14% to $1.16, compared to $1.02 for the second quarter of 2013. The improvement was primarily driven by higher franchise segment profit, which was the result of higher domestic sales at IHOP, new restaurant development over the last 12 months and lower bad debt expense.

Turning to G&A. G&A expenses in the second quarter declined to approximately $35 million from $36 million in the second quarter of 2013, mostly as a result of lower costs for legal and professional services. For the first half of 2014, G&A expenses were basically flat compared to the same period last year.

Consistent with prior years, G&A is backloaded in the second half of the year. This is mainly driven by personnel, professional services in both brand franchise inventions. And moving on to the balance sheet. The cash balance as of June 30, 2014 was roughly $100 million. This is compared to $133 million at March 31, 2014.

Cash is down from the end of March, primarily because of interest in tax payments in the second quarter. Regarding free cash flow, I want to again point out that our 2014 guidance calculates free cash flow after subtracting any mandatory lease payments and mandatory debt service to highlight how much is available for dividends and share repurchases.

Based on this method, we generated $50 million in free cash flow in the first 6 months of the year. Following our strategy, we returned approximately $59 million this year in the form of share repurchases and dividends. In the second quarter alone, we repurchased approximately 189,000 shares or $15 million of our common stock.

And additionally, we paid a second quarter cash dividend totaling approximately $14 million. Now regarding the refinancing of our debt. As Julia mentioned earlier, we issued a separate press release to announce our intention to refinance our long-term debt, and we will provide an update in due course.

We will also update our 2014 financial performance guidance, including an update on our capital allocation strategy, should a transaction be completed. It's important to note that our current interest expense guidance for 2014 does not include any savings from our refinancing.

In summary, we're very excited about the progress we've made at both of our iconic brands. We have generated solid growth and adjusted EPS this year, we continued to generate substantial free cash flow, we returned significant cash to shareholders and we're making strides to broaden the international presence of our brand.

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

Thank you, Tom. And to close, we delivered strong earnings growth in the second quarter as we continued to maintain tight management of our G&A. We are taking the strategic steps to build a solid platform for long-term growth at both of our brands.

And we continue to create value for our shareholders, returning over $29 million during the second quarter in the form of cash dividends and share repurchases. I am confident that our strategy and, importantly, our ability to consistently achieve our goals will continue to position the company for long-term success.

Now with that, Tom and I would be pleased to answer your questions.

Operator?.

[Operator Instructions] Our first question is from John Ivankoe with JPMorgan..

If I can ask maybe an indirect question about the refi, have you -- communicating or you plan to communicate a strategy that could include potential acquisitions? Or are you willing, at this point, to say that the DineEquity go-forward is will exist in the current brands you have in your portfolio?.

John, this is Ken. Thank you very much for the question. At this time, we will not be making any comments regarding the refinancing transaction..

Can we separate from the refinancing and just -- like to maybe just get back from the shared services model in terms of whether you do think that's a scalable model or you would want to scale that model for an additional brand or are you happy having what you currently have?.

Yes, we've always said, John, that the whole shared services model is both leverageable and scalable, and that remains exactly as that. So it's certainly leverageable and scalable. I think right now, we're very focused on the 2 brands and the refinancing..

Okay. Understood. And secondly, if I may, I think there's been -- maybe some average ticket movement at Applebee's maybe around Take Two as you've given customers an opportunity to trade up.

So help me understand if that's the case, and maybe put the context of Applebee's traffic as franchisees report to you relative to the industry and what you think that future trend might be..

So clearly, when you think about second quarter, we were slightly positive on the Applebee's side, as I said, 0.6%. And that was made up of both a slight traffic decline and a slight average check increase. I mean, that's certainly not what we're satisfied with. We want to see more aggressive, consistent growth, and that's what we're very focused on.

I will tell you the franchisees on the Applebee's side have been very thoughtful and strategic about pricing. I mean, we can certainly price with inflation, and certainly they have, but it's really been de minimis. They are very focused on making certain they're providing value to the guest. And we, as the franchisor, have been very supportive of that.

But clearly, our opportunity is to be much more, as I said throughout my prepared remarks, much more consistent and sustainable in that traffic growth increase..

Our next question is from Bryan Elliott with Raymond James..

Kind of a follow-up to that is just maybe ask the Applebee's question this way.

So clearly, in broad restaurant and retail consumer world, we're seeing a real bifurcation of spending patterns from upper-income consumers doing pretty well and seeing increased buying power, the spending of that and sort of the middle, lower middle strata of the income stream, not seeing any real purchasing power increase, possibly still seeing decreases and struggling with maintaining spending levels.

In the context of that, can you talk about what you're seeing at Applebee's and to drive the traffic gains that you're focusing on? And then hoping for this further work at the lower price point tiers of the menu.

Is that an area of focus, given that bifurcation in spending is clearly continuing to occur?.

I think -- it's a great question. And I think the way to think about it is over the last several quarters, we're not seeing a lot of change. Those people on the lower end that want to shop the menu, continue to shop the menu. Those on the higher end that have that capability and price really isn't a subject are of the same.

So that change, Bryan, over the last several quarters, hasn't necessarily moved a lot.

If you will -- what I will tell you is what's different is we, based on this proprietary research we did, are very focused on some target segments where we have a unique opportunity, both with our menu and our value structure and, frankly, just the way we market, to bring those people in more often, and that's exactly what we're focused on.

So think of us as not changing much from the lower end and the higher end socioeconomically, but really focused on some target segments, where we know there are some opportunity and some upside..

Well, if those target segments are not broken out by income strata, can you give us a little help in understanding what those segments are and how you expect to appeal to them?.

Yes, we're -- I'm -- it's pretty proprietary. So I'm trying to answer your question without being direct. So we do know about their socioeconomic status. More importantly, we know what they need, what they want and what their expectations are of us, specifically in the category.

And so there are some very specific things we need to do mainly in the food itself, the menu itself and in the service platform. There are very specific things we need to do to make those people come in and make them comeback more often. And that's the focus we're on right now.

I know this sounds a little bit trite, but it's really less about the ultimate price and it's much more about the menu items, the taste of the food and the service, the ambiance -- the overall experience, and we are very focused on that..

Would some of those segments then maybe fall into generational rather than income groupings?.

I would say it's -- I know where you guys are going with these questions. It's less about age and generational. It's more about sort of an emotional attune to how they think about restaurants and casual dining and us, in particular, and what it's going to take to get them to come more often.

That equation isn't just -- it's absolutely not just about price. It's the other things I mentioned. So they're very clear about what they want us to do differently, and we have to find our sweet spot, especially in competing against fast-casual.

We're not going to be ultimately just a fast-casual restaurant, but we have to find those sweet spots to more effectively compete in that arena, less about price, more about the service platform, the experience.

And then the menu is less about -- it's more about the taste of the food and certain things we have to do differently, and that's what we're maniacally focused on..

Okay. One quick follow-up, and then I'll move on.

But I recall, listening to that answer maybe several quarters ago, maybe a year or plus ago, you're experimenting -- testing with a kind of a dedicated quick order and to-go area at the hostess stand for lunch, I believe, it was, continue -- let us know if that's still underway or what the learnings from that were..

Sure. The learnings were fairly substantive, and I guess the -- and I'm sure you're going to say this seems like common sense. But one of the things we learned is for 50 years, we've been teaching people to walk into a casual dining restaurant, look at the hostess, the hostess says, "How many in your party?" and sits you.

And suddenly, after 50 years, we wanted you to walk into Applebee's and say no, "I'll take the fast-casual dining experience to the left or I'll take the regular dining experience to the right." And that was both confusing and not necessarily working for our consumer base.

So we believe there is a different way to think about each of the day parts and each of the way we may bring it to life in an Applebee's with the consumer base.

So the key learning is, if for 50 years you're used to doing it one way and now we're teaching you to do another, we have to be much more mindful and thoughtful about how we do that and we probably have to market differently to you. And we have to educate you on the why and the wherefore.

Why would it be so important to have a fast-casual lunch at Applebee's? And that really goes -- that's more of an integrated marketing strategy that goes to the menu, to the price point, to the service, to the marketing, to every aspect of it. And I think the key learning is we try to do one thing differently.

And the truth of the matter is, that entire environment at lunch really has to be different. And so we are doing some additional work and some additional testing. But it was a great key learning for us that simply just saying to people, come in and do something differently, doesn't work.

In addition to that, the other learning, in addition to the sort of what I'll call service platform, was the bar business. And there is a tremendous opportunity at Applebee's for us to play in a very different way in the bar business. That was sort of another offshoot out of some of that research.

So we're doing some pretty substantive work around the bar to make it -- I guess, the way to think about is more modern, more contemporary, more relevant to the guest of today. And a good example of that is an area like craft beer. Think of us as really exploring what we can do in craft beer.

So just being much more contemporary and relevant, but still being very thoughtful about the individual day parts..

Your next question comes from Chris O'Cull with KeyBanc..

Julia, as IHOP laps some difficult comparisons, do you think the check can continue to grow? Or will traffic gains be needed to successfully lap some of these more challenging comparisons?.

I think we've always said that we want that traffic to grow. That's the long-term health of the business, and we certainly want that. We believe that the work we are doing helps us get towards a long-term traffic increase, and that's literally what we are continuing to work against.

And certainly, our strategy is to be able to deliver the consistent and sustainable sales and traffic. It's not a marathon -- it is a marathon, it's not a sprint. So we're confident in the strategy, but it is going to take a little bit of time, if you will, to get us that more balanced results in both traffic and average check.

But certainly our goal was never just to increase the check. It was always to create that sustainable traffic increase, and that's exactly what we're focused on..

The menu changes in June, and I think there's another 1 planned for November at IHOP.

Will those be a boost to the check average? Or are they going to be pretty neutral year-over-year to the check?.

It's always hard to tell. Certainly, our test results have been that consumers love the menu we rolled out in January, love the menu we rolled out in June. Just finished testing the one that rolls in November. And in general, people really do like the changes that we are making to the menu.

Some of that is structural, some of that is architecture, some of that is engineered some of that is pricing, some of that -- well, it's less about pricing, it's more about pictures, where we put items, people read right to left -- what that looks like. And so it's the combination of all of those things.

But a lot of those check increases came from us putting the prices on the side and the drinks, and that was done last year. So it's less about pricing, it's much more about engineering and architectural work..

Okay.

Okay, but there's still a favorable menu mix shift with the new menus?.

That is correct. That's a fair -- yes, that's absolutely fair..

Okay.

And then what are some of the objectives of the Take Two promotion? Do you expect -- I mean, do you expect people to shift from the 2 for $20 platform or is it serving other purposes?.

You're saying 2 for $20 going to 2 for $25, is that what you're asking?.

No -- well, the Take Two at Applebee's for $10.99..

Yes, it's really all about giving people a difference -- different reasons to visit and broadening the appeal. 2 for $20 has been there for a while and everybody, as you know, in the industry has copied it. So it's us being innovative and creative and thinking a little bit differently about ways that provide value to the consumer.

It's not just our price, but it does provide more variety and flexibility both for our franchisees and for our consumers..

Are franchisees starting to look at the 2 for $25 that you guys have been testing?.

Yes. There are some franchisees doing the 2 for $25. Yes, absolutely..

Okay. Okay, and then just one last one.

Did the World Cup games affect your June sales at all at Applebee's?.

I never heard that. I never heard anybody say anything about it other than everybody had a favorite pick of who they wanted to win. But other than that, I never -- and I'm looking at the data as we speak, and I'm not seeing anything that in any way impacted that..

The next question is from Jeff Farmer with Wells Fargo..

You guys did touch on a lot of this, but just in reference to driving frequency, you went over a whole bunch of stuff, but it seems like we've heard a lot of these from your peers, which I know makes it tough.

But -- and again, if I think this, just the importance of new food news, everyday values, speed of service, things like shorter limited-time-offer windows, with a lot of concepts similarly seeming to pursue sort of very similar strategies, and immediately you guys sort of get the ball rolling and a lot of people will follow what you've been in the past -- having said that, it still makes it pretty difficult.

So how can Applebee's standout when even if you do have a good sort of traffic-driving idea, it doesn't take long for someone else to knock it off.

How can you sort of break through that clutter?.

I think it's a fair comment. We certainly talk about that a lot internally. First of all, we do have the largest marketing budget in the industry. So there's no question that has -- our voice is louder than anyone else's. So that certainly does provide us some opportunity. We have 37 domestic franchisees who own 1,900 restaurants.

And so they are both committed. They have the wherewithal, the access to capital to do whatever is necessary to invest in the business for the future. I never short-changed that. I mean, this is a very, very motivated, insightful group of franchisees. They've have been around a long time, so their opinion matters.

And they have been sort of working with us side-by-side through all of this. I also think it's safe to say that as we finalize some of these strategies we've been talking about, I know the way you think about them is that we're taking some pretty bold steps with the reset button. Now, obviously, the proof is in the pudding.

But I think the reset button, and really getting very bold about how we differentiate ourselves for the longer term that it gets harder and harder and harder to steal from us shamelessly, because the kind of things we're talking about are pretty bold and pretty unique, whether it's the bar business, whether it's the food, whether it's the way we market ourselves.

Those are going to be our unique differences and clearly, we own neighborhood and we've got to bring that to life. We've been talking about that for a while. So I know the proof is in the pudding, but the best way to think about it is longer term, being much bolder about the way we differentiate ourselves.

And it makes it a lot harder to be able to steal shamelessly, as we hit that reset button and think more creatively about our future. But I don't want to underestimate the importance of being bold in every one of those moves.

The good news is we're very alarmed -- aligned with our franchisees and they're very much supportive of being much more -- best way to say this, bold and aggressive..

That's helpful. And actually just a couple of, hopefully, quick questions.

Going back to Bryan's questions about that targeted customer segment that -- the conversation you guys were having, recognizing that you don't want to tip your cards too much there, but I am curious, as you look at these consumers and you do sort of the work there, do you have a decent understanding in terms of things like macro drivers, for example, that might impact their decision to visit the restaurant, job creation, disposable income growth, energy, prices whatever it is? Do you have any sort of additional layers of understanding as to what sort of drives these customers or withhold them back from restaurant visits?.

Yes, I think this may surprise you, but we've done a fair amount of proprietary research. And consumers talk less about that whether they're buying white goods or not or whether this month they got 2 tax benefits or 1. They talk a lot more about the emotional connection with a restaurant and what matters to them.

And that's the work that we've gotten just maniacally focused on, about some of the emotional things that attract a consumer or make a consumer come back more often. And the good news is, it's all the things we can control.

So the really great news is, they don't talk as much about the economy or their -- or how many hours they had to work or whether they got a pay raise.

What they talk to us about is the good news is the things we can control, whether it's the ambiance, the decor, the experience, the way they interact with the food server at the table, what they think about what the emotional connection is with the brand, all of that is more important today than it was 5, 10 years ago.

The good news is we know about it, and we're going after it with a vengeance. But it really is less about the things we can't control, which is actually the best news of the day..

Okay. And then I apologize for running long here, but just one more sort of the structural headwind that's pretty dramatically facing casual dining. And you're very familiar with this, you've been doing this a while. You've seen a lot of this happen.

So again really it's been about a decade that this industry has seen negative transaction trends, and you could obviously point to excess capacity going back to the mid to late 2000s, and there's arguably still excess capacity. But in the last 4, 5, 6, 7 years, you've seen share shift to fast-casual players, the whole foods affect, things like that.

As you look out over the next 3, 4, 5 years, any reason to believe that, that sort of longer term structural dynamic will change for the casual dining sector?.

Yes, it's really hard for me to talk about the casual dining sector, because I don't know what each individual brand is doing vis-à-vis competing more effectively. I can tell you that Applebee's has been building 40 to 50 restaurants a year. I don't see that changing. I think there's a great deal of interest in the future of the brand.

I think the work that we're doing helps distinguish and differentiate us. And makes us more competitive in the fast-casual arena, which is what I care about. So I would say, at least for our brand, I have a lot of confidence in what it's going to take to differentiate us and compete more effectively in the future.

And I see that all very much as a positive, not a negative. And then the brand carries with it a certain amount of cache because it's been around over 30 years, and so I'm going to take advantage of that as well. But I'm -- I understand the new fandangled item that comes out there and everybody gets excited about.

But what they go back is something that's not only tried and true, but that takes them with them. And then I think that's what Applebee's is intending to do, and that's the path that we're on. And so no, I'm very confident and comfortable with our brand.

It's harder for me to speak to the industry because I don't know what others are really doing to compete more effectively..

The next question is from Alton Stump with Longbow Research..

I think I just have 2 questions. First off, as far as the tablet roll-on, I don't think I heard that mentioned yet.

Any update in that? How it's going? What the outlook is? If there's any change to sort of how you view that from your last call?.

No. No real fundamental change. We're making progress rolling the program out and learning as we go and continue to make refinements. And we expect to be somewhere around the half rolled up by the end of the year..

And so there's been a lot talk about driving traffic growth at Applebee's.

Is that a key driver in your view? Or could that be a key driver of driving higher traffic?.

Yes, a lot of the folks up there that have been writing about it have been talking about us driving traffic. We don't have that knowledge yet.

I think what we're much more interested and what we are solving for is consumers told us it was their #1 pain point at an Applebee's was they didn't like the fact that the food server left with their credit card and they didn't like the fact that they would often have to wait for the check. So that goes away with this new technology.

The longer-term implications for what is does for the tips, for what it does to the speed of service or what it does to the average check -- too soon to tell..

Okay, it makes sense.

And then just one quickly follow up, could you break out at least in general terms, looking at the 3.2% same-store comp growth for IHOP, how much of that was for pricing mix versus traffic?.

So the -- let's see, on the 3.2% percent for IHOP, it looks like about 2/3 was pricing and about 1/3 was P-Mix..

The next question is from Peter Saleh at Telsey Advisory Group..

Julie, you mentioned for Applebee's a personalized experience at Applebee's as one of the pillars.

Can you elaborate a little bit more on that?.

Yes. So back to my proprietary research, not trying to give away the moon and the stars, but something that came out loud and clear, frankly, with every target segment, right, what came out is this notion that people really wanted to customize their experience as much as a possible.

And we think both with the branding of neighborhood and a lot of the testing that we're doing, there is way to customize that.

And the way you should think about that is both things we do in the experience, as well as the way we market to you, so -- and a good example of that will be a loyalty program, where I know everything about you and I know how often you come in and what you eat and what you don't eat, and when you bring your friends and family, and when you sit at the bar, and I can talk to you one-on-one and really customize that experience for you.

And certainly, pay-at-the-table technology can do that. Certainly the way we talk to you via the loyalty program and the way we allow you to work with the menu, so that you can customize within the menu. So there's lots of different ways to take you and make your experience very special and very unique to you and we're very, again, focused on that.

I don't want to give away too many secrets, but there are certainly ways to do that, that create this sort of unique unit opportunity. And some of those you're starting to see us do, which is that whole online and social marketing that we've started doing, which is having an immediate and pretty substantial impact..

Our last question is from Michael Gallo with CL King..

Both of my questions were answered, but I just want to delve into Applebee's, the loyalty program you were testing, I think, 160 locations, if I recall.

I was wondering if you could give us an update on where that stands, how it's going, when we might expect a broader rollout and what some of the findings are? And then I have one other follow-up question..

So it's probably a fair question to ask me at the next quarter's conference call. We're a work in progress. As you may or may not be aware, the biggest single thing you have to work on in a loyalty program is the algorithm, and that's what we're in the midst of working on, both technologically and, obviously, from a marketing perspective.

So we are right, smacked down in middle of working with it. The platform is built, Mike. There's no issues there. I think I mentioned before the platform has been built in a shared services environment. So the platform is there for IHOP and the platform is there for Applebee's, and both are testing it.

But right now, the biggest opportunity is the algorithm and how that works to increase traffic and delight our guests. And so we're in the middle of that process. We should have more answers for you by the October conference call..

Okay, great. And then I just have a follow-up question on tablets. Obviously, you've been rolling them out at Applebee's. And obviously, you're excited about some of the benefits there. I was wondering where the IHOP brand stands in terms of tablets, whether that's something you're looking at or just your general thoughts there..

So it's a great question. You may or may not be aware that in the IHOP system, about 50% of the system use server banking, and about 50% of the system use cashiers.

So one of the things we have to find out is whether there is a value add for the pay-at-the-table technology in both those service platforms or if one has to be more than the other, so that's the work in progress. Or do we skip that technology and go to the next? So we are a work in progress.

There's a couple other things that are ahead of that in line but are more important for the IHOP business we're taking a look at. But certainly, IHOP will learn from the Applebee's rollout and what's important.

But when you got 50% of the system doing cashier banking and 50% doing food server banking, you just got to be thoughtful about whether that makes sense. And again, there are some other technological advances that we're looking at @IHOP that, frankly, are more important than that..

This concludes the question-and-answer session. I'll turn the call back to Julia Stewart for final remarks..

Thanks, operator. And thank you, for participating today. Our next reporting date is scheduled for October 28. If you have any questions in the interim, you should feel free to call Ken, Tom or myself. Have a great day..

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude our presentation, and you may now disconnect. Have a great day..