Ken Diptee - Executive Director, IR Steve Joyce - CEO Tom Song - CFO John Cywinski - President, Applebee's Darren Rebelez - President, IHOP.

Stephen Anderson - Maxim Group Michael Gallo - CL King Brian Vaccaro - Raymond James.

Welcome to the third-quarter 2018 Dine Brands Global earnings conference call. My name is Paulette and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Ken Diptee, Executive Director of Investor Relations. You may begin..

Thank you. Good morning and welcome to Dine Brands' third-quarter 2018 conference call. I'm joined by Steve Joyce, CEO; Tom Song, CFO; Darren Rebelez, President of IHOP; and John Cywinski, President of Applebee's. Gregg Kalvin, Corporate Controller, will also be available for Q&A.

Before the call, I'll turn over to -- before I turn the call over to Steve, please remember our Safe Harbor regarding forward-looking information.

During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied.

Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filing. The forward-looking statements 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 available on Dine Brands' Investor Relations website. With that, I'll now turn the call over to Steve..

Thanks, Ken. Good morning, everyone, and thank you for joining us. As you saw in our press release issued today, we delivered year-over-year growth across several key metrics, including total revenues, gross profit, adjusted EPS, comp sales at both brands, as well as adjusted free cash flow for the first nine months of 2018.

Our highly franchised model continues to generate substantial free cash flow and at very healthy EBITDA margins. When I joined Dine Brands as CEO a little over a year ago, I knew this Company had untapped potential.

I believed we had to execute on three strategic priorities to realize our full potential and position our strong brands for long-term success. Over the last 12 months, we focused on establishing a high performance, value-based culture, driving sustainable positive comp sales and traffic and importantly, returning Dine to a growth company.

Today, I'm very pleased to say that we've made great progress on each of these priorities. We have a much more robust performance-based culture steeped in our values that places an emphasis on people and focuses on agility, accountability, continuous improvement and innovation.

This enables us to adapt to an ever-changing market condition and the needs of our guests. We've made great strides in positive sales at both brands and taking share from the competition, which provides additional upside for us as we implement our daypart expansion strategy.

In fact, this is the third consecutive quarter that both brands have outperformed their respective categories based on sales and traffic.

I would like to highlight that Applebee's and IHOP were again ranked number one by Nation's Restaurant News in casual dining and family dining, respectively, for the 11th consecutive year based on domestic systemwide same-restaurant sales. This achievement is a testament to the commitment and hard work of our best-in-class franchisees.

Lastly, our transition to a growth company is gaining traction. We're confident that we can build on this momentum as we execute an elevated guest-centric strategy to drive sales and traffic.

As part of this plan, we are increasing our investment in research and consumer insights to ensure our initiatives fulfill what our guests want and expect from us.

We're enhancing the guest and team member engagement through consumer-facing technology, we're providing guests with abundant value, culinary menu innovation and variety to give everyone a reason to visit our restaurants.

We're placing an emphasis on operations excellence in both the front and back of the house to provide our guests with the highest level of service. I'm pleased to report that our guests are seeing the difference, as both brands achieved all-time highs in overall guest satisfaction scores during the third quarter.

This is the result of our commitment to focus on every guest, every day. Our strategy also includes remodeling restaurants to provide our guests with an inviting atmosphere where they can come as their genuine authentic selves to create memorable experiences over great food.

Lastly, we're rolling out third-party national delivery platforms to enhance access to our brands and better address the convenience needs of our guests. To provide some color on this, Applebee's and IHOP recently announced nationwide delivery partnerships with DoorDash, one of the nation's leading delivery platforms.

Our brands are available options on their website and mobile app. Additionally, DoorDash is connected to our online ordering systems through a capability they call dispatch. We believe delivery will complement our existing fully integrated online ordering systems available through Applebee's and IHOP's websites and mobile apps.

John and Darren will provide more details on delivery a little later. Our guests crave our food and they want it whenever and wherever it suits them. We know that technology plays an increasingly important role in consumers' dining decisions so we're making greater use of technology to ensure that their needs are met.

To remain the leaders in our dining categories and build an insurmountable lead against the competition, we will focus our efforts on digital platforms to drive traffic, guest-facing technology and consumer data collection to provide a more personalized experience and reward guest loyalty.

At our Investor Day in February, I told you that Applebee's and IHOP were two of only six restaurant companies initially selected to participate in General Motors' connected car platform, which allows consumers to order food and make dinner reservations on the go.

As you can see, we're embracing technology to further enhance the guest experience, create competitive differentiation and broaden our ability to engage with guests no matter where they are. We've made some great strides, but still have more work ahead of us to reduce friction points for guests. We'll provide additional updates in due course.

Now, switching gears briefly to our debt refinancing. In August, we announced our intent to refinance as the call window on our securitized debt approached. After further evaluating the market, we decided to replace and significantly upsize our existing variable funding note and not to pursue refinancing of our securitized debt at the current time.

Upsizing the VFN to $225 million from $100 million provides us with ample financial flexibility for growth investments while still maintaining a very attractive fixed 4.277% on our long-term debt. We view this as a favorable outcome. Now we will continue to closely monitor and evaluate the market for future opportunities to refinance.

With that, I'm going to turn the call over to Tom to discuss the financial results.

Tom?.

Thank you, Steve. Good morning, everyone. We are very pleased with the performance of our two strong brands this quarter, which drove double-digit growth in total gross profit. I'll briefly cover our financial performance for the third quarter before turning to our revised performance guidance.

Adjusted EPS for the third quarter of 2018 increased by 56% to $1.53 compared to $0.98 for the same quarter last year. The increase was primarily due to higher gross profit from franchise operations and a decline in income taxes due to a lower corporate tax rate.

The increase in gross profit was mainly due to a 7.7% increase in Applebee's comp sales, a decline in bad debt expense and IHOP unit growth over the last 12 months. These items were partially offset by any increase in G&A expenses.

Total revenues for the third quarter of 2018 were approximately $194 million compared to approximately $175 million for the third quarter of last year.

The 11% increase was primarily due to the impact of the higher advertising contribution rate of 4.25% on Applebee's advertising revenue, the increase in Applebee's comp sales previously mentioned and IHOP unit growth over the last 12 months.

Just as a reminder, both third quarter 2018 and third quarter 2017 reflect the new revenue recognition accounting standard. Adjusted EBITDA margins for the third quarter of 2018, excluding advertising dollars, were a robust 50%. This compares to approximately 45% for the same quarter of last year.

And when you look at this margin expansion sequentially, it was approximately 40% for the second quarter of 2018. Turning to our G&A. G&A in the third quarter was approximately $41 million compared to approximately $38 million for the third quarter of 2017.

The increase was primarily due to higher cost of stock-based and other incentive compensation and some reprioritization of technology projects that increased G&A while decreasing CapEx.

I would like to highlight that G&A for the third quarter of 2018 was slightly higher that the run rate we expected for the second half of the year mainly due to the reasons just discussed.

Regarding our debt refinancing costs, during the third quarter, we explored the opportunity to refinance our long-term debt, replace our existing variable funding notes as the call window on our debt approached. This is something Steve just mentioned.

While we did assess the merits of the refinance, the interest rate environment and compared the current financing that matures in three years, we decided to proceed with a significant upsizing of the variable funding note facility, which is similar to a credit facility.

We incurred approximately $2.5 million in costs associated with this refinancing process, which is scheduled in the GAAP to adjusted EPS reconciliation. Turning briefly to our tax rate, our GAAP effective tax rate for the third quarter of 2018 was 24.5%. The tax rate was impacted by the December 2017 enactment of the Tax Cuts and Jobs Act.

The effective tax rate of 11% for the same quarter of last year was impacted by the non-cash impairment related to Applebee's goodwill of approximately $358 million, which was not deductible for federal income tax purposes.

Regarding the cash flow statement, our net income for the first nine months of 2018 was $53.4 million compared to a net loss of $412.7 million for the same period last year, primarily due to the non-cash impairment charges related to Applebee's goodwill and other intangible assets in 2017 that did not recur.

Cash flows from operating activities for the first nine months of 2018 were approximately $62 million compared to approximately $31 million for the same period of last year. The increase was primarily due to the increase in net income just discussed and the favorable impact from the changes in working capital.

Adjusted free cash flow for the first nine months of 2018 increased to approximately $63 million from approximately $29 million for the same period of 2017.

The increase in adjusted free cash flow was primarily due to the increase in cash from operations just discussed and the payoff of one equipment contract receivable in the amount of approximately $5 million in the first half of the year. These items were partially offset by an increase of $1.4 million in CapEx.

Switching gears to capital allocation, we repurchased approximately 108,000 shares in the third quarter at an average price of $73.04 per share for a total of $7.9 million. For the first nine months of the year, we repurchased approximately 384,000 shares at an average price of $72.66 per share for a total of $27.9 million.

Turning to our dividend payments, we paid a third-quarter cash dividend of $0.63 per share for a total of approximately $11 million.

On a year-to-date basis, we paid dividends totaling $40 million, representing a cash dividend of $0.97 per share declared in the fourth quarter of 2017 and cash dividends of $0.63 per share declared in the first and second quarters of 2018, respectively.

Turning to Applebee's franchisee financial health, we continue to make progress on addressing the health of our franchisees. During the third quarter of 2018, there were favorable developments that resulted in a decline in bad debt expense by approximately $3 million compared to the same period last year.

Additionally, there was a decrease in unrecognized revenues due to uncertainty of collectability. For the full year, we expect bad debt expense to be approximately $7 million, which is a slight reduction from our initial projections of approximately $8 million to $9 million provided during our first-quarter earnings call.

As part of our strategy to improve the overall health of the brand, we signed an asset purchase agreement to acquire 69 Applebee's restaurants located in North and South Carolina from one franchisee. We expect the transaction to close in the fourth quarter of 2018.

We intend to operate these restaurants with a goal of re-franchising them under favorable terms. I would like to emphasize that this transaction does not alter our asset-light strategy. Turning briefly to an update on financial guidance. I'd like to highlight a few revisions, but please see our press release for complete guidance.

Because of Applebee's solid performance in the first nine months of the year, we now expect Applebee's comps to range between positive 4.5% and positive 5.25%. The previous range was between positive 3.5% and positive 4.5%. We now expect IHOP's comps to range between positive 0.5% and positive 1.5%.

The previous range was between positive 0.5% and positive 2%. Adjusted free cash flow is now expected to range between $106 million and $121 million, mainly due to the improvement in comp sales year-to-date and expectations for slightly lower capital expenditures.

This compares to previous expectations of between approximately $99 million and $119 million. G&A is now expected to range between $158 million and $162 million, mainly due to higher performance-based personnel-related costs, an increase in litigation expenses and the reprioritization of IT projects.

This compares to previous expectations of between approximately $147 million and $156 million. GAAP earnings per diluted share are now expected to range between $4.08 and $4.23. This compares to previous expectations of between $4.31 and $4.61.

The downward revision is primarily due to costs incurred related to the refinancing process and costs associated with the closure of a restaurant. We now expect adjusted earnings per diluted share to range between $5.10 to $5.25. This compares to previous expectations of between $4.95 and $5.25.

To close, we are executing on our plan to drive sustainable sales and traffic momentum, grow incremental sales through our off-premise business and further position our brands to remain the leaders in their respective categories. With that, I'll now turn the call over to John..

Thanks, Tom, and good morning, everyone. Applebee's momentum continues to accelerate as our plus 7.7% Q3 result represents our fourth consecutive quarter of positive comp sales growth. Of note is that each of the past four quarters has delivered sequential improvement resulting in a year-to-date comp sales increase of 5.5%.

Importantly, the majority of our sustained growth is coming in the form of traffic. This organic growth reflects the enhanced relevance, appeal and health of the Applebee's brand.

Now, these results also demonstrate our ability to steal share as we're consistently outperforming the casual dining, fast casual, family dining and QSR categories on both sales and traffic according to Black Box. We're proud of this performance as it represents the best sustained Applebee's sales and traffic performance in at least 14 years.

Without question, I attribute this success to our resilient and passionate franchisees, their talented restaurant operators and the collaborative partnership they've established with our exceptional Applebee's team.

Importantly, this leadership team has now been in place for more than a year and the trust, credibility and genuine belief they've established is truly impressive. Upon reflection, our turnaround has happened a bit faster than some anticipated and we're now on a path of stability and predictability.

At this point, our franchisees have delivered 43 consecutive weeks of positive comp sales this year, a remarkable accomplishment in this mature and intensely competitive CDR category. And yes, positive momentum continues here in October. From a strategic perspective, Applebee's has returned to its roots.

We have embraced our core DNA as the neighborhood place folks come to connect with family and friends and we remain fixated on restaurant-level excellence and guest satisfaction is our top priority. Progress against our brand standards is both consistent and comprehensive under the leadership of Chief Operations Officer, Kevin Carroll.

We're also committed to delivering abundant value and variety to our guests with buzzworthy innovation on both the culinary and beverage front.

This innovation will continue to focus on mainstream and broadly appealing menu items, as you've seen most recently with Chef Bulgarelli's new pasta and bread sticks and the timely interaction of Dollar Zombies here on Halloween.

We'll continue to enhance our very popular Eatin' Good In the Neighborhood positioning with creative, targeted, occasion-based and insight-driven marketing initiatives.

Under the leadership of CMO, Joel Yashinsky, these programs now have the benefit of an additional 4.25% national contribution rate, additional media muscle in the form of a 4.25% national contribution rate.

Most importantly, we'll continue to earn preference and loyalty one guest at a time while holding our franchise partners for consistently exceeding guest expectations. On this front, I'm pleased to report that all key operating metrics continue to show significant improvement. Applebee's is extraordinarily well-positioned in this market.

We love the diversity of our guest profile as we over-index on families, Hispanics and African-Americans, three very important demographics for us, with an average household income of $70,000, are routine traditionalists and value-seekers, remain well-defined and predisposed to love Applebee's.

And we continue to leverage our unique diversity of age across millennials, Gen Xers and Boomers, with perhaps a surprising fact that millennials represent our largest segment at 30% of Applebee's guests, a significant over-index relative to the CDR category.

Our strategy is also balanced, with half of our growth coming from our core dine-in business and the other half coming from our highly incremental off-premise business, which is substantially outperforming the CDR category under the leadership of VP of Strategy, Scott Gladstone.

Off-premise sales grew 37% in Q3, now accounting for approximately 10% of our total sales mix. And while the vast majority of our current off-premise business is to go, we anticipate delivery being offered in almost 1,000 restaurants by year-end in addition to our emerging catering business.

From my perspective, no brand is better positioned than Applebee's to capitalize on off-premise demand as we fully expect our off-premise business to double from 10% to 20% of total sales over the next few years.

Additionally, we continue to refine our restaurant portfolio as we steadily execute against our strategy to close underperforming or brand-damaging restaurants. We anticipate slowing this initiative significantly next year as we approach a core base of approximately 1,690 US restaurants at the end of this year.

In closing, we are pleased with our progress, but far from satisfied. I'm currently very proud of our franchisees and our team, who certainly continue to challenge the status quo with a disciplined yet wonderfully entrepreneurial spirit.

There is no doubt in my mind that our business model featuring 33 smart and sophisticated franchise partners is a distinct competitive advantage in this market. Again, it's clear to me that America has rediscovered its love for Applebee's and our confidence and optimism couldn't be higher as we look forward to next year.

With that, I'll turn it to Darren..

All right. Thank you, John, and good morning, everyone. I am pleased to report that IHOP's comp sales momentum continued into the third quarter, increasing 1.2% and marking the third consecutive period of comp sales growth. We've outperformed the family dining category every quarter this year based on sales and traffic according to Black Box data.

We're confident that this trend is sustainable as we continue to execute against our broad-based strategy, which encompasses significantly enhancing the guest experience, running great restaurants, driving traffic and being where the guest is. An important part of our plan to drive sustainable positive sales and traffic is daypart expansion.

We've changed the narrative about our lunch and dinner occasions. We've clearly proven that we can attract guests throughout the day, not just at breakfast. Since the launch of IHOP's highly innovative and all new Ultimate Steakburger platform in mid-June, our dinner daypart has delivered positive comp sales every week.

We also experienced positive sales growth across the lunch and overnight dayparts. Our new lineup of Ultimate Steakburgers helped drive over 300 basis points of improvement in dinner daypart traffic in the third quarter of 2018 compared to third quarter of 2017.

Having great tasting, quality burgers is how we breakout from the clutter and start to grow our business beyond breakfast while continuing to take share from the competition.

Given the popularity of burgers and the extremely high quality burger that we've developed, we're very optimistic about the potential of this platform to drive additional share gains. IHOP's to-go business is an integral part of our long-term strategy to drive sustainable sales and traffic.

This incremental sales channel is primarily driven by traffic and we've experienced very healthy growth. Let me provide you with some details. For the third quarter, to-go comp sales increased by a solid 35% and to-go traffic grew by approximately 26%.

By comparison, to-go comp sales and traffic were approximately 8% and 4%, respectively, for the third quarter of 2017. Off-premise now accounts for 7% of overall sales, up from approximately 5% a year ago. We are confident we can grow this business to the midteens over the next few years with much of this being incremental contribution.

To complement our already strong to-go business, we recently announced the rollout of our first and largest national delivery program in partnership with DoorDash. Currently, there are over 700 IHOP restaurants participating with DoorDash. We expect to have approximately 1,000 restaurants signed up by the end of the year.

Given the continued rollout of our national delivery platform with major partners such as GrubHub and Amazon, we believe there's additional upside for our to-go business.

To-go and delivery options now have a greater influence over consumers' decisions on how and where they dine and we've taken strategic steps to address the convenience needs of our guests. Switching gears to running great restaurants.

Focusing on operations excellence to ensure our guests have an exceptional experience each and every visit is vital to driving sustainable, positive sales and traffic. Enticing guests to come back for that extra visit is how we're going to succeed.

It is this focus and commitment to guest satisfaction that has led to IHOP having the highest absolute scores for overall satisfaction and revisit intent in all of family dining and casual dining for the second consecutive quarter.

Additionally, I'm very pleased to say that not only do we have the highest overall satisfaction scores, we also achieved an all time high score in September. Congratulations to our franchisees and team members on this amazing accomplishment.

We have sharpened our focus on all aspects of operations excellence and guest satisfaction and clearly our guests are seeing the tangible results. Turning briefly to development, our franchisees continue to open restaurants at a healthy pace during a time when no other competitor in the industry is growing their unit base.

IHOP franchisees opened nine net new restaurants in the third quarter and opened 28 net new restaurants in the first nine months of 2018. I'd like to highlight that this year will mark another milestone in IHOP's history when we open our 1,700th domestic restaurant. Regarding international development, there is great demand for IHOP globally.

We are leveraging all the great work being done here domestically and bringing it to an increasingly global audience. Over the last 12 months, we've added 17 net new restaurants, bringing the total to 123 restaurants globally and expanded our presence in growing markets such as Mexico, Panama, Thailand and India.

And in the past few months alone, we've signed deals that will, for the first time, bring IHOP to a new continent, South America, with new franchisees in Peru and Ecuador. We will continue to expand our international presence, which we view as an important growth engine for Dine Brands.

Just as new unit development is important to keeping the unit base revitalized with newly imaged restaurants, the remodeling of existing restaurants is equally relevant to significantly enhancing the guest experience.

Keeping the atmosphere in our restaurants contemporary and appealing is conducive to driving incremental visits from guests and therefore sustainable positive sales and traffic. Our franchisees continue to make great strides on the Rise 'N Shine remodel program, completing 71 remodels in the third quarter.

Since the inception of the program, franchisees have remodeled nearly 800 restaurants or approximately 47% of the domestic system. We expect this pace of remodels to continue at an estimated run rate in the range of 250 to 300 per year until the program's completion. As I said earlier, we have a sharpened focus on guest satisfaction.

We believe this includes the overall experience in our restaurants, not just the exceptional service our guests have come to expect from IHOP. With that said, we recently opened our first Rise 'N Shine 2.0 restaurants in Southern California and in New Jersey.

These restaurants are equipped with new technology to enhance the guest experience and improve operational efficiency. Guests will be able to experience our no wait tool to provide them with more accurate wait times and improve their overall dining experience.

Other in-restaurant technology includes server tablets, which improves speed and accuracy, and wireless credit card devices that are brought to the table for guests' convenience and speed. The device removes friction by allowing guests to quickly pay and never have to give up their credit card.

The introduction of these technology platforms and the latest iteration of the Rise 'N Shine remodel ties in all aspects of enhancing the guest experience. We believe this will be a real differentiator in the category and drive the sustainability of the brand as the leader in family dining.

I will continue to update you on progress as we learn more from these initial test restaurants. Lastly, we wrapped up the quarter with our global franchisee conference. We spent several days sharing plans with our franchisees for the future and celebrating 60 years as the leader in family dining.

Our franchisees are passionate, committed and excited about tackling the next 60 years of IHOP's success. With that, I'll turn the call back over to Steve for his closing comments.

Steve?.

Thanks, Darren. Well, you can see why we're so excited about the great progress we're making on Dine's transition to a growth company. While we were pleased with our third-quarter results, we recognize that there's more that can and will be done to drive sustainable, positive performance.

We are confident we can build on the current momentum by staying the course on our long-term plans and further positioning Applebee's and IHOP to take advantage of the share gains in their respective categories.

We remain focused on driving top-line growth and accelerating initiatives that will continue to differentiate our two category-leading brands. Now with that, I'd be pleased to open the call for questions.

Operator?.

[Operator Instructions]. Our first question comes from Stephen Anderson from Maxim Group. Please go ahead..

Just wanted to speak to Steve about the -- about loyalty and what you would -- what kind of a form this -- any kind of loyalty program would take and what kind of timetable you would suggest in trying to roll that out..

Yes. We're not actually looking at a specific traditional loyalty program. What we are looking to do is to drive more loyalty through our system. Look, we have raving fanatics about these two brands, and so what we want to do is drive more frequency from those customers, so we're exploring alternatives how to do that.

We do believe it's going to involve digital engagement in a big way, and so we are in the process of formulating what it is that will drive more frequency from our customers and drive loyalty and increase the dialogue between the two.

The normal reaction of, well, we need to go to a points-based loyalty program, that's really not what we're looking for. We're looking for more engagement with our customers and a higher level of frequency, and so we're going to look at lots of different options that might drive that..

Okay. And just something unrelated, I wanted to ask about where you are in evaluating the potential for a third concept..

Yes, so we obviously are very engaged in that. That's part of the reason we enhanced the level of the VFN. So we are currently in the process of evaluating lots of potential alternatives and we're beginning to have some dialogue.

We don't have anything imminent to talk about, but our goal is to be able to add a brand within the next year to 18 months, and I'd say we're probably on track to do that..

All right, thank you..

Our next question comes from Michael Gallo from CL King. Please go ahead..

Steve, you mentioned in your prepared remarks some increased investments that you're making in R&D to drive more innovation, more new products.

When do you expect we will be able to bear fruit from that? And how much are you investing this year? Should we think about that as kind of on an -- going to be at a stepped-up level on an ongoing basis? Or is that a number we should think of that will move up a little bit higher over time?.

Yes, let me -- I'll have Tom talk to the allocation of the dollars and what to expect in terms of the investment level. But the answer is relatively near term. We are testing several different programs that are going to do several things. First is reducing the friction points with the consumer.

So there are things that we've talked about in the past that we're in restaurant testing and we're hoping to move quickly to roll out over the next, call it, within a year.

But we're looking at things like pay at the table, obviously on your own device; tablets for the servers; being able to order ahead, meaning you can place your order, come to the restaurant, place your device on the table, order launches to the kitchen.

So, and then you can change that order or add to it or pay on your own, on your own timetable or engage with a server. So what we're trying to do is give the customer and the guests in the restaurant more optionality. Our folks love engaging with our servers.

Our servers love engaging with our guests, and so I don't think that's going to change in a big way, but what we're going to do is give our customers more optionality. In addition to that, we're using technology in the back of the house to reduce labor and to look at opportunities to save time and money.

We've got several initiatives underway that John and Darren can talk to in some detail about what we're doing to improve margins in the restaurants, and that's been working really well. As you know, in a pretty tough margin environment, our margins are improving. So we are -- we believe that a lot of these investments will do several things for us.

Every time we remove a friction point with a customer, it is going to involve digital engagement with the customer, which is going to give us information about the customer and the ability to communicate with them more. And on the other side, we believe we can make our restaurants more efficient.

John and Darren, you want to talk a little bit about some of the efforts we've got in your individual restaurants?.

Yes, sure. Yes, Michael, this is Darren. As I mentioned in my prepared remarks, we've launched the Rise 'N Shine 2.0, which is really geared around just what Steve said, removing the friction points from the guest experience. And so, the no wait wait-listing process allows for guests to put themselves on a wait list.

As you're probably aware, we are on pretty significant waits on the weekends in particular. And so allowing the guest to have some predictability about when they'll be seated and arrive at the restaurant with less dwell time in the restaurant; really helps reduce defection from those guests that are waiting.

The server tablets have really -- so far have improved speed and accuracy and help improve table turns and also improve the efficiency of the front of the house operation. And then paying at the table just really responds to a guest need for security and feeling confident that they don't have to give up their credit cards.

In addition to that, it allows us to really engage on a more digital basis with our guests as we gather more information, and then we can reach out to them on a one-on-one basis. So, those are some of the things that we've got going on in the IHOP brand. John, you can comment on Applebee's..

Michael, the -- yes, we innovate on three fronts -- guest, operational, financial as Steve alluded to, from a financial perspective. In addition to all the great kind of innovation investments taking place on the guest front, we are looking at our P&Ls, our franchisees' P&Ls.

And as we've discussed, both Darren and myself on prior calls, we engaged PwC late 2017. We are making meaningful progress in cost reduction both from a food standpoint and a labor standpoint in addition to our supply chain initiatives. Think of 100 basis points annually over the next two to three years. That's our target.

Certainly have exceeded that in year one here in 2018 and expect the same moving forward..

Mike, this is Tom. Let me just wrap up real quickly with your question on cost. So for 2018, we don't anticipate we're going to be exceeding what we had originally talked about with respect to IT investments. Having said that, as I alluded to, there is some shift in geography here. As we look -- we use agile development, as a lot of IT shops do.

And so some of the projects that were reprioritized, as the year goes on, go from CapEx -- capitalization of development cost, and go to G&A in being expensed in the current year. And so that's really the only change in terms of the numbers here..

Great. And the second question I have is for John on to-go. I think you mentioned Applebee's to-go sales are up 37% in the quarter.

Can you remind us how many Applebee's stores had delivery to start the quarter, where that ended at the end of the quarter, and where you see that going over the next couple years? Because it strikes me that you still have a lot of the system that, at least at the beginning of the quarter, didn't even have delivery yet. Thanks..

to-go, delivery and catering. Catering certainly is an emerging opportunity for the brand. Delivery represents incremental growth, but our primary near-term focus with our franchise partners is on the off-premise to-go business. And again, substantially outperforming the category.

It's reasonable to expect the doubling of the off-premise business at Applebee's within the next three to four years. Our run rate is probably 2 to 3 times that growth rate of the CDR category at the moment according to Black Box. So we're well-positioned given our scale, our number of locations, our variety, our value positioning.

We like the off-premise business..

Great. Thanks..

Our next question comes from Brian Vaccaro from Raymond James. Please go ahead..

Just a couple topics I wanted to touch on. Starting with the Applebee's comps, just so I make sure I heard correctly. Obviously it's very encouraging to see the updated comp guidance implying the positive comps in the fourth quarter. And John, I just wanted to make sure I heard correctly.

You said that comps remain positive in October?.

Correct. Positive momentum; won't quantify that, Brian, but, yes, that's accurate..

Okay. A quick one on Applebee's segment income and that franchise expense line specifically. Tom, I think you said bad debt expense was expected to be $7 million for the year, but I think the Q said your year-to-date bad debt expense was down around $10 million, $9.9 million I think. You saw a $9.9 million reduction in bad debt.

So can you help square those two data points?.

Yes. So, one thing that might help is to think in isolation about the third quarter. So bad debt expense decreased over $3 million compared to the same period of last year. And so, for the first three quarters, we're talking about a $9.9 million -- so nearly $10 million decrease for the first three quarters as compared to the same period of last year.

Does that help?.

So, I guess -- but we're still -- so what is -- I guess maybe just cut to the chase. What does that imply for bad debt expense in the fourth quarter? Because you said you expect that line to include $7 million of bad debt expense. You're saying that--.

Real small amount in the fourth quarter..

Okay. Okay.

So not much impact to reported franchise expense in the fourth quarter expected?.

That's correct..

Okay, all right. And then on that updated franchise segment income guidance for the year, just wanted to quickly confirm.

That does not include the impact of the acquisition you disclosed this morning of the 69 units, right?.

Does not..

Okay, great. And then last one on that topic, I noticed also that the loans to franchisees increased to a little over $20 million from $14 million.

Just to clear up any confusion, can you provide more color on those loans? And also how they impact your income statement as it relates to reported royalty collections and bad debt expense in the current quarter?.

So we don't comment on the allowance for doubtful accounts, but we have talked about this -- the various forms of assistance that we provide to franchisees, Brian. And so that's what this number that you're mentioning relates to. So some of the allowances have effectively been converted.

We've worked with individual franchisees so that now there's in aggregate about the $22.5 million of these loans on payment plans outstanding, so we think this is, again, part of the process of working with these individual franchisees to come up with good solutions on what was otherwise an allowance in the past..

But Brian, the way to think about, which is I think where you were going, is that does represent upside to us in those cases, in those fund to repay. We have greater certainty in terms of expectations going forward..

And then the other thing you need to remember though is that that -- those loans would represent both advertising fund as well as royalties, so there's -- so one has an upside potential to the Company, one of them has an upside potential to the advertising fund..

Yes, okay. All right, that's helpful. John, you mentioned seeing meaningful improvement in the Applebee's franchisee profitability.

Could you ballpark where those store margins stand today on a run rate basis?.

Brian, I didn't quantify that and just would resist doing so.

Suffice it to say, if we were to look at today versus year ago, our franchisees, given their revenue growth, given their -- the stability in the business model, given the cost reduction on the P&L, are substantially better positioned to address their debt, their lease terms, their royalty and advertising payments.

The brand is just so substantially more stable from a financial standpoint, and that includes individual franchisee unit economics..

Okay.

And then on this acquisition, the 69 units, can you give us a ballpark on the expected purchase price of those units, or any details on the performance of these units in terms of per-store sales volumes or store margins?.

Yes, so Brian, we're prepared to give detail on that transaction, but it's really premature until we close. As you know, we have an agreement, but as you and I both know, not all agreements close. When the agreements close and we're back together again, we will share information on obviously the impact that it'll have going forward.

It will be a separate reported segment, so we'll be talking about it separately. And we'll give you an indication of what the capital requirements are, including purchase price and CapEx..

All right, fair enough. And last one for me, on the G&A, the raised guidance midpoint, $160 million.

I understand personnel costs are up as you build out the teams and infrastructure, but could you help us understand how much there is in that line this year of nonrecurring legal costs? Or just thinking about at a base level of G&A, you said that at the Analyst Day back in February, had to think about that line.

Can you maybe help us recast that -- give an update on that?.

Yes, no, good question. I already mentioned one of the items that represented some of the reprioritization of IT projects.

Some of these projects at the beginning of the year might have been thought of as being development -- internally developed software that now, as the year progresses, the team has decided to prioritize things that run through G&A expense. So that's about a third of it. Another third is the incentive compensation that you had mentioned.

And some of the incentive compensation -- as you know, with all public companies, relates to stock price. We've had pretty good performance year-to-date on stock price, so that requires an accrual. That goes through incentive comp.

Something that, again, if you look back to the beginning of the year, you make some good estimates on this stuff, and you sometimes have some good outperformance. It's a good thing. And then finally, as you mentioned, there are some legal expenses that weren't necessarily anticipated earlier in the year that will run through the balance of the year.

So, those three are really the main categories. They are roughly a third and a third and a third, roughly, each, on the G&A uptick..

So Brian, I think you characterized the piece on the personnel as an additional investment. It's not. It's related to incentive comp..

Okay..

It will be what it is every year. So it just so happened the stock price has performed well, therefore the incentive comp is up for the team..

Understood. Okay. Thanks very much..

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

Great. Well, thank you again for your time today. We are scheduled to report results for the fourth quarter on February 21, so we look forward to speaking with you then and sharing our further progress. Have a great day..

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