Ken Diptee - Executive Director, IR Julia Stewart - Chairman and CEO Tom Emrey - CFO Gregg Kalvin - Corporate Controller.

Brittany Whitman - Longbow Research David Carlson - KeyBanc Capital Markets Brian Vaccaro - Raymond James John Ivankoe - JPMorgan Chase Peter Saleh - Telsey Advisory Group.

Good morning and welcome to the Fourth Quarter and Full Year 2014 DineEquity Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. [Operator Instructions] Please note that this conference is being recorded. And I will now turn it over to Mr. Ken Diptee. You may begin, sir..

Thank you. Good morning, and welcome to DineEquity's fourth quarter and fiscal 2014 conference call. This morning I'm joined by Julia Stewart, Chairman and CEO; Tom Emrey, CFO; and Gregg Kalvin, Corporate Controller. Before I turn the call over to Julia and Tom, let me remind you of our Safe Harbor regarding forward-looking information.

During the call, management may discuss information that is forward-looking and involve 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 context of these factors, which are detailed in today's press release, as well as in our most recent 10-K filing. The forward-looking statements made are as of today, and assumes no obligation to update or supplement these statements.

We may also make reference to certain non-GAAP financial measures, which are described in our press release, also available on DineEquity's Investor Relations website. I'll now turn the call over to Julia Stewart..

Thank you, Ken, and welcome everyone. 2014 was a stellar year in many ways for DineEquity, and I'm very please to report that we finished on strong note. Our two iconic brands achieved positive domestic same-restaurant sales for both the fourth quarter and full year.

For the fourth quarter, IHOP sales rose 6.1% marking the highest quarterly increase since the first quarter of 2004. IHOP fiscal 2014 sales rose 3.9%, which is the strongest full year increase in the last 10 years. I’d like to highlight that traffic results were positive for the entire year.

During the Applebee's, fourth quarter sales increased 2.8%, representing the highest gain since the second quarter of 2011. I would like to highlight that Applebee's sales rebounded broadly during the second half of 2014.

Further as you saw in our press release, fourth quarter adjusted earnings per diluted share increased by 18%, excluding the impact of one-time items related to the securitization refinancing. On a full-year basis, adjusted EPS grew 12% compared to 2013, excluding the impact of one-time items.

Fiscal 2014 was highlighted by several significant achievements. IHOP and Applebee's continue to outpace the respective categories based on industry sales data. And for the seventh consecutive year, both brands were again number one in their respected categories according to the latest ranking by Nation's Restaurant News on the basis of U.S.

system wide sales. We generated robust free cash flow of approximately $130 million. We successfully completed the refinancing early in the fourth quarter which increased our financial flexibility and the ability to generate stronger free cash flow.

Our focus and commitment to refinance the debt resulted in attractive lower fixed interest rate for the next seven years. We announced a new capital allocation strategy, which included a meaningful increase and our quarterly cash dividend and a significant increase in the share repurchased authorization.

We also returned approximately $75 million to shareholders in 2014 through dividends and share repurchases combined. This excludes roughly $70 million in cash dividends paid on January 9. I’m very proud of our accomplishments, and we will continue to execute our strategy to build on this success in 2015. Now turning briefly to our brand.

For 2014 IHOP achieved its strongest positive sales performance in the last decade. Notably sales were positive across all dayparts. A shift in advertising strategy helped to contribute to the solid full year results.

During the second half of the year, DineEquity in a large majority of its IHOP franchisees worked together to increase the annual contribution percentage of restaurant growth sales to be IHOP's national advertising fund. The increase spending began in the fourth quarter.

I'm very pleased with the high level of collaboration on this proposal to establish an optimal advertising spin level. I believe this will allow us to remain the category frontrunner and to build an insurmountable lead in family dining. We're taking both steps to further improve performance and take IHOP to the next level.

I would like to congratulate our franchisees and the entire IHOP team for their tireless efforts on a job well done. Regarding Applebee's, for 2014 Applebee's achieved positive full year sales. To build on this momentum, we conducted a through valuation of our strategy for Applebee's to remain the category leader.

We completed a great deal of comprehensive research and developed a new long term vision for the brand and while we're pleased with Applebee's performance in 2014, there is certainly more work to be done. Now let's look ahead, to build our last year's strong achievements and drive the business forward, we are focused on four key strategic priorities.

I’ll take a moment to briefly discuss them. Priority number one is to drive higher growth from our existing brands. We are in the long term brand building business. We have a lot of positives to build on at both brands as the fourth quarter's results have shown. In 2014, we discussed hitting the reset button in Applebee's.

As a reminder, this included a deep dive into several areas including our pipeline of new and improved manual items, a value proposition, our advertising and media mix and our bar business. This strategy is part of our long term vision for the Applebee's guest experience. This year you will see the tangible roll-out of some of these initiatives.

In fact, you’ve already seen the branded commercial for our new bar snacks and shareables promotion which first aired nationally on February 23. We are further positioning Applebee's at an even more differentiated way, so stay tuned for more. At IHOP our plan for growth, revolves around the execution of our four core brand strategy.

These include, further improving in restaurant operations. We are continually raising the bar on operating standards and introduced improved capability, to asses the quality of our guest experience. We are also working closely with franchisees, who do not yet meet the higher standard.

Continuing to evolve our differentiated brand positioning and communicating more effectively, building on our momentum to drive even more loyalty from our guest. Having initiatives in place to help drive franchisees profitability.

In addition, the purchasing co-op has made great strives in cost reduction, and will build on the great progress we've made in 2014 on franchisee alignment. We believe that successfully carrying out this plan will drive sustainable long term growth.

Priority number two, is to driven an increase in franchisee restaurant development, by enhancing our processes to be even more customer centric. We are committed to taking our programs to the next levels. We know that restaurant economics are especially important to our developing franchisees.

So our broad thinking includes reviewing our brand prototypes to ensure that they are cost effective. And speaking of development, we continue to be focused on international growth. We are investing and expanding beyond our domestic borders, as we cultivate strong development partnerships and target key geographic areas.

It goes without saying that aggressive sales growth is a positive factor for encouraging development. Priority number three, is to maintain strong financial discipline. This means controlling G&A. And as you know, since the Applebee's acquisition in 2007, we have significantly reduced our G&A.

And the overarching priority is to drive long term shareholder value by generating strong free cash flow, the majority of which we intend to return to shareholders. We plan to do this through a sustainable capital allocation program.

For a most of the second half of 2014, we will unable to conduct any share repurchases mainly due to the unique circumstances related to the debt refinancing. In addition, we were required to maintain cash on the balance sheet related to the securitization refinancing in order to fund certain accounts and the interest reserve.

Despite this, we repurchased $32 million of our common stock in 2014, up 8% from the prior year. To close, I want to emphasize that developing and making our two iconic brands even stronger, is the highest priority. To this end, it is our goal to provide our franchises with the best support possible.

We intend to thoughtfully invest in innovation that drives sustainable and positive sales and traffic. With that, I'd like to turn the call over to Tom, to walk you through a review of the financial results.

Tom?.

Thank you, Julia. Welcome and good morning everyone. I'll briefly cover a few highlights for the fourth quarter and fiscal 2014. For the fourth quarter, the 18% year-over-year increase in adjusted earnings was mainly due to significantly lower cash interest expense as a result of the refinancing.

For fiscal 2014, adjusted earnings per diluted share rose 12% to $4.73 from $4.24 in the prior year, excluding the impact of one-time items related to the securitization.

In regarding the refinancing, after a required 30-day notice period, we repaid the entire outstanding principal balance of roughly $751 million on our 9.5% bond on October 30 2014 and along with the required make-whole payment premium of approximately $36 million.

In addition to our interest obligation on the new debt issued on September 30, we were also required to pay approximately $6 million of interest on the 9.5% bonds that were outstanding. Turning to G&A, fourth quarter G&A increased by roughly $4.5 million compared to the prior year's fourth quarter.

This is mainly due to the timing of both franchise conference expenses and personnel costs compared to the fourth quarter of 2013. For the full year G&A increased by $2.3 million or approximately 2%.

Regarding our tax rate for 2014, the GAAP tax rate of approximately 29% was lower than the statutory federal tax rate of 35% mainly due to the fourth quarter adoption of certain production, activity deductions and research credits. Now a few comments on the balance sheet.

The cash and cash equivalent balance as of December 31 2014 was $104 million, down slightly from $106 million a year ago. Remember approximately $56 million of this cash is related to gift card programs and advertising costs.

You will also see approximately $52 million of restricted cash on the balance sheet of which a substantial portion is required to be held in trust because of the securitization. Now let me touch a little bit on our guidance we issued today, but I would like to have you refer to our press release for more details.

We look for strong comps between positive 1% and positive 4% at Applebee's in 2015 and at IHOP we expect sales to range between positive 2% and positive 5%. We expect interest expense to be approximately $63 million of which $3 million is projected to be noncash. This reflects a substantial reduction from interest expense in 2014.

Free cash flow is expected to range between $114 million and $124 million. And please note that going forward we have adopted a more traditional definition of free cash flow. Free cash flow will be defined as cash provided by operating activities, plus receipts from notes and equipment contracts receivable less CapEx.

The income tax rate is expected to be roughly 38% and for 2015, G&A is projected to be between approximately $149 million and $153 million. CapEx in 2015 is estimated to be approximately $9 million. I would also like to highlight, that our 2015 guidance reflects the impact of 53rd operating week in fiscal 2015.

We expect that the pretax impact of the additional week will be approximately $6 million in the fourth quarter. Lastly, the opportunity has presented itself to refranchise the Applebee's company operated restaurants within the next 12-months. And although there can be no guarantee a transaction will take place within that time frame if at all.

So to wrap up, 2014 was a successful year for DineEquity and we will continue to execute in our key strategic priorities in 2015 and build on the momentum we have created.

Julia?.

Thanks Tom. In summary, 2014 was a better year for DineEquity. We achieved double digit growth in adjusted EPS and increased our steady strong free cash flow. The successful completion of the securitization refinancing paved the way of our new capital allocation strategy.

We returned roughly $75 million to our shareholders in 2014 and we're fully committed to both components of our capital allocation plan. We are taking the necessary strategic steps to further position the company and our brands for additional success.

We will continue to act on our key priorities to enhance our brands and build a platform for sustainable growth including our potential acquisitions. I'm extremely proud of our senior leadership team, our franchisees, and all of our team members for their contributions and continued dedication.

And now, Tom and I would be please to answer your questions.

Operator?.

[Operator Instructions] From Longbow Research, we have Alton Stump on line. Please go ahead..

Hey guys, it's actually Brittany Whitman on for Alton today. Congrats on the quarter. I just had a question on the tablet placement at Applebee's you guys were doing.

I was wondering if there was any update you had or if you're seeing a meaningful lift from this at all yet?.

We are on track to - as we said earlier, I think last year we were on track to finish up here this year and have it system wide in the Applebee's business domestically. Too soon to tell what kind of impact it's having..

Okay.

And then any preliminary consumer feedback from some of the changes you're making at Applebee's also?.

I'm sorry, say that again. It was hard to hear..

So just was wondering if you guys have had any preliminary consumer feedback from some of the changes you're making on the Applebee's side?.

Yes, some of that we saw in the testing that we did on some of these items but I think it helps the – guided our guidance if you will for 2015 based on that very fact..

Got you. Very helpful. Okay, thanks. That's all I have..

From KeyBanc, we have David Carlson on the line. Please go ahead..

I have a couple of quick questions.

In regards to the free cash flow guidance just to confirm, the $114 million to $124 million that you guys provided today is under the definition of the new definition of free cash flow that you're using so cash from operations plus notes receivables plus less CapEx, correct?.

That's correct..

And would you assume maybe a comparable amount of the receivable notes in 2015 from what we saw in 2014? I think it was around $15 million..

Yes, more or less..

Okay. Then just trying to get a sense I was unable to join the first couple of minutes of the call but in terms of the IHOP comp, can you give us a little bit of a sense, Julia, what really drove it in the fourth quarter? Was it the inflection in guest counts? If you can give a little bit more detail there that would be appreciated..

Yes. I talked a little bit about this act that DineEquity and the IHOP franchisees had collaborated and come together and actually were contributing more dollars into the national advertising fund and that additional spending started in fourth quarter.

So, part of that increased in fourth quarter is for that very fact, and then obviously it's also due to the environment and it's also due to the work that we were doing at IHOP, it's a combination of everything..

Okay, sounds good. And then one last question just to follow-up on tablets. We had actually done a channel check recently of the store and hadn't really seen payment available on the devices.

Where are you guys exactly with the payment option?.

That's what they’re working on as we speak to reroll that out and continue throughout the system. And as I said, we’re pretty much on track to finish that up this year at some point, but yes finishing it up..

Okay. Thank you, guys..

Raymond James, we have Brian Vaccaro on line. Please go ahead..

Good morning. Thank you for taking my question. Tom, I had a quick question just on the cash from ops. In 2014 it came in a little bit below the low end of your guidance I guess. Obviously the core underlying business is doing very well and exceeding expectations.

But was there a moving piece somewhere in the tax payments or other net working capital swing that might have - wasn't in that original guidance that we should take note of?.

Not in 2014..

Okay.

So I mean your G&A was in line, cash from ops was about $118.5 million, I think your guidance was a little bit higher than that, so there wasn't a line here or there that stood out to you? I guess the net working capital was a use of cash this quarter and was a pretty nice source in the prior year so I just wanted to see if there was something may be in an outline but we can follow up offline as well on that.

As you think about 2015, and back to the free cash flow, the change in the definition, wanted to ask specifically, how you're treating - the principal receipts are long term receivables, is it still net of the principal payments on long term receivables as it was in 2014?.

So, this is Gregg Kalvin in Corporate Controller. So, what we're doing is, we're moving the capital lease obligations in the definition both on the top end and the bottom end.

So, some of the capital lease obligations were in receipts from receivables and we are moving those, and we are moving the payments on the capital leases in the financing obligation. So there is a small net effect there of about $6 million, $7 million for the positive - that will affect 2015 if you will..

Okay. Then I guess more fundamentally, Julia can you give us an update on the progress on the international front and where things stand and should we expect to maybe see some increased international expansion as we move into 2016? Thank you..

We're obviously very excited about the international side of the business, we talked a little bit about that in the past, and continue to feel great about the relationships and partnerships we have, the development plans in place. I've been hesitant to give a long term number and how we see our efforts come to fruition.

But everything that we see, every measurements that we have, leading and lagging indicators all says that we are doing a great job and we'll continue to grow and prosper.

And as part of our development numbers and guidance that we gave you for fiscal 2015, I think coming early 2016, we will be in a better position to give more of a longer term guidance but feel very good about where we are..

Okay, thank you. That's helpful..

From JPMorgan, we have John Ivankoe on line. Please go ahead..

Hi, great. Several short questions if I may. Firstly just on that issue in terms of the principal payments on capital lease and financial obligations, it was $11.8 million cash in 2014.

I guess would it be something similar to that in 2015? Do I understand correctly that that is now excluded from your free cash flow calculation?.

The payments that we received on capital lease obligation, basically the IHOP rental business where we take it in and spend it out. There is a net positive like I said about $7 million in that number, that was in 2014, - I'm sorry, a net deduction of $7 million in 2014 that will pickup in basically 2015 with the positive if you will..

I'm sorry. We can talk about this off-line. I'm still not understanding it.

So I guess the genesis of the question and I will ask it directly, is the free cash flow guidance overstated in that it's not including that principal payment on capital lease obligations?.

It's not overstated, it's just definitionally you'll pick up about $7 million extra in free cash flow in 2015 on an apples-to-apples basis compared to 2014..

And that $7 million numbers in guidance correct, Gregg?.

Correct..

Okay. I will -- we'll talk about it afterwards. I'll make sure I understand it. So a couple of easier ones. There's a pickup in IHOP advertising contribution from franchisees I think you mentioned for the fourth quarter and that will continue in 2015.

How much was that change?.

We don't disclose that for competitive reasons but if you go into the P&L and you see the K it will show you what goes in and what goes out for 2015, you’ll get a sense of it..

Okay. Refranchising the remaining Applebee's restaurants, I think there's only 23 of those.

You don't need the money, what was the philosophical reason to I guess get rid of your company store operations?.

As Tom said on his prepared remarks, it really wasn't opportunistic situation where a franchisee came to us and we felt like there was an opportunity for synergy, it may or may not come together.

But certainly we wanted to learn – you're absolutely right, its not about the money but we feel like the way we test and the parameters we have with our franchisees, we're well able to continue the testing. We do a lot of testing with our Applebee's franchisees.

And they are terrific about it and so we had an ongoing process and system with them that will continue..

And the final question was on acquisitions. It wasn't in your early prepared remarks but it was tucked in there at the end.

Could you just publicly remind us in terms of what you're thinking about what the parameters, size and in terms of something that's established versus non-established what have you?.

Right now it's the same as it is and may be I should figure out a way to say the exact same sentence every quarter. But really it is absolutely what we’ve said all along, that it would not compete with family dining or casual dining so that basically leaves specialty or fast casual.

But it needed to be something where we could take it and grow it with our existing franchisees perhaps domestically and perhaps internationally. And at the right price, and it had to be a good fit and it had to meet our core competencies or franchising marketing and development.

So maybe it's a needle in a haystack, maybe not but that’s clearly what we are looking for..

Are you far along with anyone or still just collecting ideas at this point?.

We are still investigating there is nothing imminent..

Thank you..

[Operator Instructions] And from Telsey Advisory Group, we have Peter Saleh on line. Please go ahead..

Great, thanks. Julia, a couple of quarters ago you had talked about a significant opportunity to gain more sales at the bar and talk to a little bit about craft beers.

Can you give us an update on where you stand with that and where your alcohol mix is and maybe just a thought on where you think you guys could push that alcohol mix?.

Sure. We were at almost 14.5 for the quarter, fourth quarter and we feel very comfortable and the work that we are doing. Everything that I talked you about earlier in 2014 is now in fact.

In fact yesterday, I saw an update of everything very promising, probably too soon to start guiding on what that looks like, but the early returns if you will have been stellar, and very, the consumers is very excited. It is not a particularly costly endeavor.

It's just a matter of timing and sequence but the testing that Steve and the team is doing currently is very exciting. So, stay tune, we’ll have more as the year progresses..

Great.

And just any update on the test of loyalty for 2015?.

No, not a real update. There is lot of work going on, as you might well imagine loyalty is a complicated business that not only includes the algorithms but getting it right from a consumer standpoint and sitting within both the brands and where their strategies are. So, stay tune for more of that. That's some heavy lifting.

So that's going to take some time..

Great. Thank you very much..

Thank you. And we will now turn it back to Julia Stewart for final remarks..

Thank you so much operator and thank you again for joining our call today. The reporting date for the first quarters result is scheduled for April 30. In the interim if you have any questions please don't hesitate to contact Ken, Tom or myself. Thanks again..

Ladies and gentlemen, this concludes today's conference. You may now disconnect..