Ken Diptee - Executive Director, IR Julia Stewart - Chairman & CEO Tom Emrey - CFO.

Brian Vaccaro - Raymond James David Carlson - KeyBanc Capital Markets Michael Gallo - CL King & Associates Alton Stump - Longbow Research Steve Anderson - Maxim Group.

Welcome to the Q1 2016 DineEquity Inc. earnings conference call. My name is Cynthia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ken Diptee. Mr.

Diptee, you may begin..

Good morning and welcome to DineEquity's first quarter 2016 conference call. 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, 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 evaluate such forward-looking information in the context of these factors which are detailed in today's press release and 10-Q filing. The forward-looking statements are as of today and assume 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 via our website. I will now turn the call over to Julia.

Julia?.

taking a more strategic approach to the breakfast daypart, differentiating IHOP from the competition, rolling out a new remodel program, and continually improving operations. So let me provide just a little more detail. Let's begin with our strategic approach to the breakfast daypart.

Since the launch of the new IHOP menu design in June 2013, we've continued to fine-tune and streamline it, resulting in much easier navigation and a higher average check. Building on this foundational work, a new menu will be launched on May 16.

The menu will better emphasize that our food is made fresh for you and customizable, which are significant differentiators between IHOP and breakfast daypart competitors. In fact, over 80% of IHOP's guest checks are customized to accommodate guest requests. We are also leveraging our strong equity and breakfast innovation into other day parts.

We are conducting proprietary research on occasion expansion. Our focus is centered on creating additional visits from guests beyond breakfast or from those that don't dine during traditional dayparts and are looking for other ways to enjoy the delicious food we serve.

Additionally, we are in the process of establishing a strategic relationship with a third-party to extend the reach of the brand beyond our restaurants. On differentiating IHOP from the competition, we are working on building our lead in family dining by focusing on unique points of differentiation.

We will continue to introduce new menu items from our deep pipeline that are unique to the brand and leverage our expertise in breakfast. We will provide great food that is freshly made to order and customizable, which are options that you can't have with any QSR restaurant. We are currently evaluating our off-premise business with to-go and delivery.

And remember, IHOP is the brand that has offered all-day breakfast for 57 years. Turning now to the new remodel program. IHOP has an incredibly strong brand image. We know that influencing how our guests think and feel about IHOP is imperative to our continued success.

The new program is more comprehensive than we have traditionally required, and addresses all areas of the restaurant, from seating to flooring to restrooms to waiting areas and exterior treatments.

Approximately 45 franchisees have completed the restaurant remodel to date, and we expect our franchisees to remodel about a quarter of the domestic system this year.

The program is still in its early stages, so it's probably too early to definitively gauge the impact on sales, but we believe that the remodel would enhance the overall guest experience and brand image. And lastly, we are improving operations excellence.

We've made some good progress on improving our guest satisfaction metrics as a result of a heightened focus on restaurant operations. We know that our franchisees' team members are the greatest assets to creating a warm and consistent guest experience every day.

To communicate these key points of differentiation, we are leveraging our digital and social media footprint to create a more engaging IHOP experience with our guests. Last year, IHOP had a social media audience of 4 million, up 8% from the prior year.

Compared to the competition in family dining in 2015, IHOP had the most mentions from Twitter users, had the most fans on Facebook, and had the most followers on Instagram. Now, with that, I'm going to turn the call over to Tom to review the first quarter's financial results.

Tom?.

Thanks, Julia, and good morning everyone. Today, I'll provide a brief overview of our first quarter financial results. Turning first to the income statement. Adjusted EPS in the first quarter declined to $1.58 from $1.64 in the same quarter of 2015.

The decline was primarily due to the expected increase in G&A, a 3.7% decline in Applebee's comp sales and the impact on gross profit from the sale of the remaining company-operated Applebee's in the third quarter of 2015.

As a reminder, we had 11 total company-operated restaurants in the first quarter of 2016 compared to 36 in the same quarter last year. Switching to G&A. On an adjusted basis, G&A in the first quarter increased by approximately $3 million compared to the same quarter of 2015.

This increase was significantly driven by higher personnel costs related to filling key executive positions in 2015, which we've discussed before, and higher costs for travel due to the timing of a global operations meeting and other franchisee meetings held in the first quarter of 2016 compared to the same period last year.

When you include the approximately $2 million of nonrecurring consolidation costs, G&A was roughly $39 million in the quarter relative to $34 million in the first quarter of last year. We still see full-year guidance for G&A to range between $154 million and $158 million.

Again, this includes a total of approximately $4 million of nonrecurring costs related to our restaurant support center consolidation. Remember there is some higher second half of the year seasonality associated with our full-year G&A as we've discussed with you in the past.

We will continue to closely manage our G&A to balance the need to be disciplined while making necessary investments to move the business ahead. Turning to the cash flow statement. Cash flows from operating activities were $37 million for the first quarter of 2016 compared to $41 million for the same quarter in the prior year.

The decrease in cash from ops was mainly due to a decline in net income and timing related to the collection of gift card money in which an extra week of higher volume holiday gift card collections fell into the fourth quarter of fiscal 2015 as opposed to the first quarter of fiscal 2016.

I'd like to highlight that the lower collection of gift card money was partially offset by less cash paid for interest on our long-term debt in the first quarter of 2016 compared to the same period in 2015. And please note that the initial interest payment on our securitized debt represented five months of accrued interest through March of 2015.

All subsequent quarterly payments, including the payment made in the first quarter this year, represented three months of accrued interest.

The decline in cash from ops and marginally lower net receipts from notes in equipment contract receivables were partially offset by favorability in CapEx, resulting in free cash flow of approximately $39 million. We continue to stand by our guidance for 2016 free cash flow, which is expected to range between $116 million and $126 million.

And as a reminder, our free cash flow guidance reflects nonrecurring tax payments totaling approximately $10 million related to deferred gains from the repurchase of our debt, primarily in 2008 and 2009, approximately $6 million in cash payments related to our restaurant support centers consolidation, and the impact of fiscal 2016 containing 52 weeks compared to 53 weeks in fiscal 2015.

We returned a total of $37 million, or 96% of free cash flow to shareholders in share repurchases and a quarterly cash dividend. To give you some color, we spent approximately $20 million in the first quarter to acquire over 214,000 shares of our common stock. With that, I'll now turn the call back over to Julia for her closing comments. Thanks..

Thanks Tom. In summary, we continued to generate strong free cash flow of approximately $39 million in the first quarter. We are executing on our plan to accelerate sustainable organic growth.

The consolidation of our restaurant support centers is almost complete and is yielding the expected results to date and fostering greater collaboration across the organization. Regarding Applebee's, we have confidence in our overall strategy to get the brand back on track.

We will soon launch a new platform that is differentiated from what we've seen in the category, and we are very excited about the rollout. We are also optimistic about the new remodel package, which is currently being tested.

At IHOP, we again outperformed the category, and we are focused on four key pillars to build on our momentum, which gives us great optimism about their potential positive impact on the brand. We will also continue to thoughtfully explore a strategic acquisition.

And lastly, we are on track to meet both of our domestic and international development plans. And with that, I am pleased to answer your questions, both Tom and I.

So operator?.

[Operator Instructions] Our first question comes from Brian Vaccaro with Raymond James..

Thanks and good morning. Julia, I wanted to start just by getting your perspective on the current industry trends, the softness we are seeing in casual dining, especially over the last six to eight weeks, and a lot of moving pieces from a macro and industry perspective.

But what do you think is causing the sequential deterioration in your view?.

Obviously, we comment on first quarter, and we didn't see sequential decline. So from our Applebee's perspective, actually as we went through the quarter, it got better. So I can't speak for the industry. I can certainly speak for Applebee's that we are very, very focused.

I think I mentioned this a couple of times, but I do believe there is a bit -- from the consumer's perspective, there is this perception of a sea of sameness in casual dining. And that's the work that we are really doing, is to change that perception, if you will.

And if you think about it, for the last five years, Applebee's has either been positive or flat in comp sales. So, this is really our first part of the year that we've ever seen this kind of decline.

So we are very focused on doing what we think is right to turn that trajectory around and differentiate the brand from what I think is the perception of the sea of sameness..

And just to clarify, you said that the monthly cadence at Applebee's, it improved as the quarter progressed? Is that right?.

That is correct..

Okay.

Any color on the IHOP side, how that sort of progressed through the quarter?.

IHOP was a little bit more steady than -- it pretty much stayed the same throughout the quarter. That cadence was a little bit different, and obviously it had a fabulous ‘15 and working hard to continue the momentum into ‘16..

And can you comment on daypart trends at both brands and really I guess focusing on Applebee's mostly, but anything you'd highlight in terms of consumer behavior, menu mix shifts, et cetera, that might shed some light?.

On the IHOP side, it was a very substantial growth in breakfast, and not so in lunch and dinner. We see a real opportunity and a decline in the lunch and dinner business. We have a real opportunity to get that business back. On the Applebee's side, it was pretty much all dayparts. There wasn't a huge distinguishing factor.

In terms of area of the country, it was pretty much across the board we saw the decline other than New England, and there's a couple of factors going on in New England. If there's a bright spot, one of them would be part of New England had been testing this new platform that we're going to launch here shortly and had more of a positive trend.

So that's a bright light..

Okay. That's helpful. I wanted to ask also if I could just on the remodel, I guess at both brands.

And Applebee's, starting with that, can you give some color on sort of some of the key attributes of the remodel, what you see as most important to the remodel, and then any sense of average investment costs that will be required?.

Yes. On the IHOP -- well, actually on both sides of the business, the one thing we have learned, and this is not necessarily a newsflash, but the exterior remodel is critical. You absolutely have to have consumers see a difference as they drive by that something is different. So there has been a tremendous work on both brands.

The team, working with franchisees, has done a very nice job of really sort of -- think of it as contemporary meets relevant -- keeping within the brand purview but making it a wow. So I have been very impressed by both brands' work on the exteriors. Obviously we've done consumer research and consumers love it. It's new and contemporary.

They still see the brand, but it's a wow. So both brands have done that work. And then on the interior on the IHOP side, I think I mentioned this in my prepared remarks, there is a good 50% of the system easy that's going to have to do bathroom remodels, which in this case will be some real upgrade, and then obviously the dining area as well.

So that work is full speed ahead on the IHOP side. Probably a little soon on the cost scene. Probably by the next call, I'd have enough data and I could give you a real sense. I think it's certainly not probably over $150 million, but I just don't know the actual --.

You're still finalizing it..

Yes, we'll finalize it. And then on the Applebee's side, we are probably just a little bit premature in terms of giving you a cost. They are doing some final testing and look-see, but I will tell you what we are seeing and what we've seen through the consumer research is incredibly exciting. So feel really, really good about that..

And our next question comes from David Carlson with KeyBanc..

Hi Julia, Tom, I have several questions this morning. Julia, you guys have made -- you've made tremendous efforts over the past year plus to broaden the Applebee's brand appeal, yet the comps have never underperformed the segment by a wider about. You mentioned in your opening remarks that you're going to stay the course with respect to your strategy.

That said, what gives you confidence that the current strategy is the right one for the brand?.

Fair question. I would say, maybe in this order, these four things -- the major investments the franchisees are making in the business, both in capital and training. I would say the differentiation of the platform in the industry; I would say the incredible massive effort on training.

I mean, I've never seen anything like it in the history of the brand. And then I would say the new advertising campaign, which will launch here shortly. So I would say all of those things are going to have a bearing on it.

And then clearly we've done a fair amount of research, which I would call my insurance, for how does the consumer view the kinds of things we are about ready to do. And the research has led me to believe that -- and the testing that I mentioned in the last question has led me to believe not only are we on the right track, but early signs..

That's good. A follow-up, some of your competitors are revamping their value platform offerings to better compete with the aggressive promotional environment of the QSR segment.

Just are you guys altering your value platforms in response to the softer sales environment?.

Yes. I know there's a lot of people in the world of discounting. I guess the way we think about it, we have one of the, as you know, lower average checks in the category. We've kept our checks -- I think the franchisees have done a remarkable job of keeping the check in line, and really being responsive to the consumer.

Our whole notion behind the platform, behind the work we are doing, is really for the consumer to continue to look at Applebee's and say that's a $30 experience for $13. It's this notion that we are way outperforming our price value quotient and really giving people what they want, wanting, so that's really our focus.

It's less about going on television and price pointing. It's more about getting consumers and exceeding their expectations. That's what all this work has been about, a real focus on providing that every day incredible price value. So ours is more of an everyday platform as opposed to special LTOs..

Fair enough. And then just the last one on the remodel and I'll hop back into queue. I know you stated that franchisees are required to remodel every six years. You stated that on the last several calls.

But with same restaurant sales performance at Applebee's diverging further from the segment that's already struggling, coupled with the rising wage environment, how receptive are franchisees to the remodel package you are proposing?.

So, very receptive. And again, I think, if you think about the last remodel, again, it was due in six and they did it in 3.5. So, I think they believe, just like we do, that a freshened or a more contemporary and relevant remodel helps their sales.

So I think this is less about all the ROI treatment and more about the cost of doing business to stay relevant and be contemporary and make a difference. So there's been a lot of support.

And I think I mentioned on my pre-prepared remarks that we have every step of the way been collaborating with the franchisees on the remodels, so it's not us going on half whatever. It's really the joint effort and I think their desire to be not only competitive and relevant that really offers a guest a wow.

And these are important assets and they put a lot of money into them, so keeping them relevant, I've not had any pushback. What I think is more their question to me is how quickly can you get it done. I think, if anything, they would love it yesterday. So that's our focus..

And our next question comes from Michael Gallo with CL King..

I wanted to just tease out a little bit on the new platform that you're planning on rolling out. I was wondering, one, how many stores you tested it in, and then what you saw in terms of how the platform was used, what kind of effects you saw in traffic versus ticket, and where you saw a bigger influence in terms of lunch versus dinner. Thanks..

So, you won't like my answer, which is I'm going to keep this kind of a secret. I'll have a lot more information here. We are very excited, very optimistic, about this transformational platform, which is happening in the next couple of weeks.

And I believe providing additional details at this time would really undermine both our marketing and advertising strategies ahead of the launch and give our competitors a jump-start. So, I'd rather not say, but I think I said on my earlier question-and-answer that one of the places we tested it was New England.

And obviously now not all of New England, but part of New England and that's the one area of the country that's positive. So enough of a testing platform that we feel very comfortable, enough of a research platform that we feel very comfortable.

And again, you've got every franchisee in the system who spend some money and the wherewithal to make it happen. So there is a maniacal focus and support for doing that..

And I just wanted to tease out, I know you've talked about this in prior quarters as you didn't really see it, but has Texas become a bigger headwind for Applebee's, or did you see anything regionally from that standpoint, or has it still been kind of performing like the rest of the system? Thanks..

You ask about Applebee's, and Applebee's Texas is negative just like the rest of Applebee's. So there's not really -- there might be a slight more deterioration in the Southwest than the rest of the country. But I think, as I mentioned, all areas of the country with the exception of New England were negative in the first quarter..

And while we are on that topic, did you see anything different there at IHOP?.

Yes. At IHOP, we saw a slight decline in the Southwest as compared to the rest of the IHOP, which was up..

And our next question comes from John Ivankoe with JPMorgan..

Hi, this isn't John. It's actually Michael on for John. He's traveling. But I did have a question first for Tom, and it's on G&A. Adjusting for the $4 million that you guys are going to spend for the consolidation implies kind of $150 million to $154 million for a full year.

And based on what we saw in the quarter, it seems like second quarter to fourth quarter G&A growth would be kind of flattish. And I just want to see if you have any comments on that..

Well, we don't really do it by quarter. And as I said in my comments, the back half is going to be -- typically has a little bit higher seasonality.

But the $150 million to $154 million still works based on our forecast and then of course the $154 million to $158 million includes the restructuring costs for the restaurant support center consolidation..

I think the big thing we always say, Michael, is the franchisee convention. And this year, we have both conventions..

In the back half..

In the back half. So we always include that because that is an expense. And this year, both of those conventions are in LA, so we will have more participants than we have historically. That's the one big thing..

Understood.

And then for the franchisee investments, you've talked about this a lot, is that going to come in the form of possible royalty relief and that's why franchisees are very much on board and collaborating with these investments?.

Okay, Michael. Did one of the franchisees put you up to that question? Just joking. No, there's no incentive. It's in their best interest to grow their business and invest in their business. They've made major investments. Think about it. Land building and FF&E is over $2 million. They want to keep that asset in its best shape and form.

So whatever we can do to accentuate it or grow it, it's in their best interest to do it. So again, they've been involved with this every step of the way and are very supportive. Our investment, as you know, comes in the form of G&A, and from time to time CapEx and the creativity and the innovation and the strategy that we employ.

So it's a good partnership and they are very supportive on both brands..

Thank you for that. And then just a couple of strategic questions. Kiosks and tabletop tablets, is there any kind of color on tests and rollouts and timing? And then additionally, you mentioned the strategic relationship with a third-party at IHOP. Any color there would be helpful if you're willing to provide..

So, the tabletop device is rolled out to all of the Applebee's in the system, and the IT team working with the Applebee's, a small group of Applebee's franchisees, is working on optimizing that to give it more bang for the buck, so that work is in process so that they all have it. And that's the work that they are doing.

As I mentioned on my prepared remarks, very excited about the early returns on the online ordering app that we just installed and the mobile app. A lot of positive support there, so feel really good about that work on the Applebee's side.

And then on the IHOP side, I wanted to pique your curiosity and let you know that we are looking to work with a third-party, but probably too soon to say much more about that. But we will keep you posted..

And our next question comes from Alton Stump with Longbow Research..

Good morning. Just looking at Applebee's, if I look back here for a moment, you guys had a pretty aggressive new product and also marketing shift, if I recall, during the first half of last year for Applebee's. Obviously it didn't -- has worked out as well as you would have hoped.

Is there any color that you can give me as to lessons that you learned in the first half of last year just with those changes and how you can apply that to your upcoming changes that you're going to be making behind the brand?.

So, the first half of last year you said we made major marketing changes.

Are you talking about the advertising, or are you talking about what we promoted?.

Yes. You had, if I recall, three major product launches, sandwiches, bar pub items, and then it seems like you were targeting more of the Millennial crowd, you were just hopping on TV messing with your advertising. It seemed to be a fairly major anyway shift in strategy..

So I think the lesson learned, and I said this on the last two calls, is that our initiatives, certainly last year and probably historically, have not been big enough and bold enough.

And all that work that we did last year was great for the platform, it was great to establish ourselves, it was important foundational work, but it wasn't big enough and it wasn't bold enough, and one would argue it's not fast enough. So we need to do a lot more in bigger and bolder, and that’s I think what you're going to see more of.

There's a tremendous amount of focus on bigger and bolder for Applebee's for not just the balance of this year, but for the next several years. That's the biggest difference. Isn't to say that that work isn't important.

There's a continual focus on Millennials, but I think there is a way to do that, that is much more about the remodel and about the food quality, and the perception through the work that we are doing than just introducing a new LTO or a new product..

And then a quick question on IHOP and I'll hop back in the queue. Is that still doing well but we have seen two stack [ph] comps slow a bit here over the last couple of quarters. How much of that is due to hamburger QSR guys, maybe McDonald's obviously being very promotional in the breakfast category.

How much is due to that versus like overall comps just getting more difficult for you? And sort of as you go forward, how do you better from that if we do see those major guys stay promotional in the breakfast category?.

Fair question. Two things. One, just to refresh your memory, IHOP is doing very well at breakfast and has been very successful, no issues. I think I mentioned earlier our opportunity is our lunch and dinner business sort of fell off for us in first quarter.

And we have a unique opportunity to do things differently, we believe, which is a real focus for us with everything I just mentioned at lunch and dinner. The other thing is I mentioned we have to compete more effectively about talking to the consumer about what we do that is uniquely different than breakfast category.

So you can't get an egg anyway you want it at a QSR restaurant. You can at IHOP. You can't get it boiled; you can't get it heavy fried or over easy or -- it's just not that business.

So our business models are different, but I think we have to be more aggressive in how we talk to the consumer about any differences that you get, and the food any way you want it, made fresh to order, those kinds of things I mentioned earlier we have to do more of.

In terms of our competitive set or our aggressive posture and price value, we have all-you-can-eat in first quarter at IHOP, which has always been a very successful promotion for us. So that is uniquely different. We still have a tremendous pipeline of innovation and creativity.

I think our real opportunity is in speaking a little bit differently to our wide swath of guests, and potential guests, about the things we do in our model and in our brand that you just can't get anywhere else. And that's I think our greatest opportunity..

And our next question comes from Steve Anderson with Maxim Group..

Yes, I wanted to talk about some of the costs associated with the support center consolidations. You had, call it, $2 million in Q1.

Can you give us some guidance for any remaining costs we should expect for Q2 and beyond?.

Yes, we are looking for the total for the year to be about $4 million, and that was embedded in our guidance for the year..

That's in the guidance, right..

This is Ken. We didn't break it out by quarter. End of Q&A.

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

Well, thanks again for joining us on this call. We are scheduled to report results for the second quarter on August 3. Obviously, if you have any questions in the interim, feel free to contact us. And thanks again for your time today..

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