Welcome to the Q2 2019 Dine Brands Global Earnings Conference Call. My name is James, and I'll be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I'd now like to turn the call over to Ken Diptee, Executive Director of Investor Relations. Mr. Diptee, you may begin..

Thank you. Good morning, and welcome to Dine Brands' second quarter conference call. I'm joined by Steve Joyce, CEO; Tom Song, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's. Before I turn the call to Steve, please remember our safe harbor regarding forward-looking information.

During the call, management may discuss information that is forward-looking, involves known and unknown risk, uncertainties and other factors, which may cause the actual results to be different from 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 assume no obligation to update or supplement these statements.

You may also refer to certain non-GAAP financial measures, which are described in our press release and also available on our website. With that, I'll turn the call over to Steve..

Thanks, Ken. Good morning, everyone, and thank you for participating today. As you saw in the press release that we issued this morning, we continue to drive significant improvements in gross profit, adjusted EPS and adjusted EBITDA.

We've made strategic decisions over the last two years that have improved our fundamentals and enhanced Dine's ability to deliver sustainable long-term growth. Our plan has gained meaningful traction and produced strong results across key financial metrics for the second quarter.

While I am pleased with our overall financial performance, this was a tough quarter for Applebee's comp sales. The brand sales were primarily driven by underperformance in our dinner daypart as well as industry volatility and competition during the quarter.

Make no mistake, we certainly do not believe that our second quarter comp sales are indicative of a shift in Applebee's fundamentals or brand relevance, both of which remain strongly intact.

Additionally, we continue to see strong growth potential in our off-premise business at both Applebee's and IHOP, with each brand experiencing heavy growth in off-premise comp sales and traffic for the second quarter. We believe that delivery will become a greater contributor to this platform.

To that end, we've made meaningful progress in negotiations with delivery service providers to secure more favorable terms for both brands. John will provide more brand details a little later. Now let's turn to IHOP. Last month, we announced that Jay Johns was appointed as the brand's President.

Jay has been already an integral part of the success of IHOP for the last seven years while holding various operation and leadership positions during his tenure at Dine. We had Jay in a succession planning process, which pays dividends as the transition has gone completely smoothly without any hiccup.

Jay's knowledge of the IHOP business, solid relationship with our franchisees and his strategic leadership over the years make him well positioned to lead the brand. I look forward to Jay's valuable contributions to IHOP's continued growth. I am very optimistic about the road ahead for the brand.

We recently completed a study on the domestic development opportunity for the brand, which reveal that there is meaningful white space for traditional and nontraditional formats. We believe this will translate into well-balanced system growth. Jay is here to discuss IHOP's performance, and we'll provide details on the brand strategy a little later.

Switching gears, I am very pleased to report that we successfully completed a $1.3 billion refinancing of our long-term debt through a securitization last month.

Our new financing facility is comprised of $700 million of five year senior secured notes with a fixed coupon rate of 4.194% and $600 million of seven years secured -- senior secured notes with a fixed coupon rate of 4.723%. This transaction resulted in a blended rate of 4.438%, which obviously, we are very pleased by.

Additionally, we replaced our existing VFN of $225 million while leaving the borrowing capacity unchanged. This provides us with ample financial flexibility for growth investments. We view this refinancing as very favorable and believe it reflects the strength of our brands and Dine's very attractive franchise business model.

One of the many compelling attributes of our highly franchised model is the ability to generate stable and substantial free cash flow. This enables us to return significant capital to our shareholders, which remains our top priority. With that, I'm going to turn the call over to Tom to discuss the financial results.

Tom?.

Thank you, Steve. Good morning, everyone. Our overall performance in the second quarter reflects the stability of our highly franchised business model and the levers we have to address both opportunities and challenges we face. We delivered strong growth in several key metrics, which underscores the health of our brands and Dine's solid fundamentals.

With respect to comparable same-restaurant sales, Applebee's decreased 0.5% for the second quarter of 2019. While this result did not meet our expectations, Applebee's is still positive 0.6% year-to-date. IHOP's comparable same-restaurant sales increased 2% for the second quarter of 2019, achieving the sixth consecutive quarter of sales growth.

As mentioned last quarter, the shift in the Easter holiday from the first quarter of last year through the second quarter of this year impacted our comps. We estimate that this holiday shift adversely impacted Applebee's by 20 basis points and favorably impacted IHOP by approximately 30 basis points during the quarter.

We're pleased that we were able to grow our top line revenues, excluding company restaurant sales for the quarter, by 5% compared to the second quarter of 2018. This was the result of unit growth at IHOP and sharply improved collections at Applebee's.

For the second quarter of 2019, adjusted EPS was $1.71 compared to $1.03 for the same quarter of 2018. The 66% increase was primarily due to higher gross profit as a result of a $16.5 million franchise or contribution made to the Applebee's national advertising fund in the second quarter of 2018 that did not recur this year.

Additional core drivers that contributed to the 21% increase in the franchise operations gross profit included improving Applebee's royalty collections compared to last year.

Regarding total franchise operations expenses, excluding advertising expenses, the overall decline was due to both the lack of franchisor advertising contributions, as discussed, and the decline in Applebee's bad debt expense compared to the second quarter of 2018.

I want to highlight that we had virtually no bad debt for IHOP and Applebee's in the second quarter of 2019. We anticipate that bad debt will continue to remain at these low levels going forward. Regarding G&A, for the second quarter, G&A was $39.4 million compared to $38.8 million for the same period of last year.

This represents 2.1% of the overall system sales. The slight increase year-over-year was primarily due to higher personnel-related cost and the fact that this also includes the above-restaurant G&A attributable to our company-operated restaurants.

We had mentioned that this accounts for $6 million of our annual G&A, so G&A per core franchising operations was actually lower year-over-year. Given the advantages of our highly franchised model, G&A is one of the levers we focus on.

We will continue to diligently manage our G&A and expect modest growth over the long term consistent with the rate of inflation.

As a reminder, our G&A during the second half of the year is generally affected by the timing of certain expenses, including our franchisee conferences for each brand, which are scheduled for September and October of this year. Turning to our tax rate.

Our GAAP effective tax rate for the second quarter of 2019 was 26.4% compared to 48.3% for the same period of last year due to tax adjustments discussed earlier.

To provide some color, during the second quarter of 2018, we increased our tax provision by approximately $6 million related to the adjustments from IRS audits for tax years 2011 through 2013. These adjustments increased our effective tax rate for the second quarter of 2018.

In the second quarter of this year, the IRS audits concluded, allowing us to accelerate the collection of certain tax benefits recognized in prior years. This resulted in a refund of $13.3 million, which was received in the second quarter. Turning briefly to the balance sheet.

As Steve mentioned earlier, we successfully completed the refinancing of our 2014 fixed rate senior secured notes and variable funding senior notes. We believe that with our highly franchised and asset-light business model provided us with access to a very attractive securitization market.

Similar to our previous securitized debt structure, the repayment of principal is not required when our leverage ratio is less than or equal to 5.25x. Also, exceeding this leverage ratio does not violate any covenant related to the new notes.

As of quarter end and based on the definitions in our 2019 base indenture, our leverage ratio was 4.57x, and our debt service coverage ratio was 5.4x. By comparison, our leverage and debt service ratios -- debt service coverage ratios at the end of the first quarter were 4.75x and 4.95x, respectively.

So to be clear, leverage declined and coverage increased when comparing Q1 to Q2 of this year. As noted earlier this year, our prior guidance did not incorporate the effects of this refinancing, but I will [Technical Difficulty] slightly increase our cash interest expense. The negative impact for 2019 is approximately $0.07 per share.

On an annualized basis, the negative impact will be approximately $0.12 per share. We're pleased with the outcome of the financing, which provides a solid foundation for the company. Turning to the cash flow statement. Our very stable business continued to generate strong adjusted free cash flow.

For the first six months of 2019, adjusted free cash flow was $66 million compared to $28 million for the same period last year. Consolidated adjusted EBITDA for the second quarter of 2019 increased 35% to $68 million compared to $50.2 million for the same quarter last year.

Excluding advertising revenue and company-operated results, our adjusted EBITDA margins in the second quarter of 2019 improved to 52.7% from 40% for the same quarter of last year. Both brands contributed to this margin improvement. With the solid financial position of our company, we have prioritized the return of capital to our shareholders.

We returned a combined total of over $47 million in the second quarter. This was comprised of approximately $12 million in quarterly cash dividends and the repurchase of approximately 392,000 shares of our common stock at a total cost of $35.3 million.

This amount in the second quarter alone exceeds the $35 million we repurchased in the entirety of 2018. Again, we lowered debt leverage and increased debt coverage during this quarter while returning capital to equity shareholders. This speaks to the solid cash flow generation that the business provides to our investors.

Switching gears to our 2019 financial performance guidance, I would like to highlight some revisions. These updates reflect, among other factors, our performance has improved during the second quarter, our overall outlook for the remainder of 2019 and the completion of our refinancing. Please see our press release for complete details.

We now expect Applebee's domestic system-wide comparable same-restaurant sales performance to range between zero and positive 1.5%. We now expect IHOP's domestic system-wide comparable same-restaurant sales performance to range between positive 1% and positive 3%.

We revised expectations for total segment profit, excluding the company restaurant segment, to be between approximately $370 million and $380 million.

We now expect general and administrative expenses to range between approximately $163 million and $166 million, including noncash stock-based compensation expense and depreciation totaling approximately $40 million. We now expect adjusted earnings per diluted share to range from $6.80 to $7.05 per share.

To close, while we have had meaningful improvements in key metrics, it's a competitive environment where we need to be aggressive to gain market share. We are focused on continuing to improve our results in a disciplined manner while effectively managing our G&A and prioritizing the return of cash to shareholders.

With that, I'll now turn the call over to John..

Apple Mountain in Utah and Louisiana Apple in Oklahoma, Indiana and Kentucky. We're also very proud of our new company-owned restaurants in the Carolinas. After seven months of operation, these restaurants now rank number five on traffic and sales out of 30 total entities.

As we move forward, we'll continue to opportunistically evolve our franchise portfolio with new franchisees as well as existing franchisees seeking to grow.

In each instance, we will require a geographic fit, a demonstrated track record of restaurant industry performance, a deeply experienced operating team and the financial resource required for ongoing investment in the Applebee's brand. On the asset front, after closing four U.S. restaurants in Q1, we closed an additional 13 restaurants in Q2.

In total, we expect to close approximately 20 to 30 net restaurants this year, with most of those being domestic. Year-end 2019 will mark the successful completion of Applebee's three year strategy of closing underperforming restaurants. Beginning in 2020, we expect a normalized closure rate of less than 1% of U.S.

restaurants, and we'll then begin a smart and very selective return to new unit development. As I've previously stated, this marks a meaningful point of stability and predictability in Applebee's future state performance.

In total, since 2017, we've closed approximately 10% of our restaurants while transacting another 7% of the portfolio with a select few additional transactions to come. Turning to the P&L. Restaurant margins remain a top priority for the brand.

With labor pressures mounting, our PwC restaurant profitability initiative represents a critically important brand differentiator for Applebee's. By leveraging our scale through a disciplined cross-functional process, we are currently on track to exceed our annual goal of 100-basis point cost reduction in our restaurant P&Ls.

While most of this reduction centers on food, packaging and paper, we're now unlocking meaningful opportunity on the labor and technology side of the business. In total, 70% of these savings will flow through to the restaurants' bottom line, while 30% will be reinvested in menu quality and value initiatives.

Finally, our franchise partners remain unified in support of our strategic plan as evidenced by the recent commitment to expand their 4.25% national advertising contribution throughout all of 2020. This ensures we leverage our scale as we look to further differentiate Applebee's under our Eatin' Good in the Neighborhood umbrella.

In closing, our team and franchise partners are exceptionally talented, and they understand how to successfully navigate through adversity to reestablish sustained growth. To that end, after extensive meetings last week, we've already applied Q2 learning and modified our balance-of-year plan accordingly. With that, I'll turn it to Jay..

running great restaurants, driving traffic, being where the guest is and reinventing our guest experience. I'll briefly touch on each of these. First, for being the leader in family dining, we're committed to running great restaurants. To drive continued growth in our core business, we're addressing several key areas.

Among these are menu simplification and manager training. Our simplification strategy involves streamlining our core menu to improve the overall guest experience as well as front and back of the house execution.

This effort will provide our guests with a menu that meets their needs and is easier to execute by a restaurant staff, helping ensure order accuracy and speed while also helping our franchisees offset cost by removing rarely used SKUs and reducing labor expense. In the second quarter, we introduced a best-in-class restaurant manager training.

This included the implementation of new training materials and manager workshop to improve the validation process and certified over 2,000 managers within 18 months. This will enhance the operations in our restaurants and improve the overall experience for our guests. Moving to the second initiative of driving traffic.

This remains a top priority, with a focus on capturing incremental business from current guests while also gaining share. Our menu strategy includes maintaining our leadership for breakfast while driving business beyond breakfast and providing our guests with relevant value offerings.

In the second quarter, we took culinary innovation to the next level with the introduction of our new BreakFEAST promotion. This new iteration of our popular breakfast combos had a positive impact on our comp sales and our breakfast daypart. Providing our guests with a strong value proposition is just one tactic in a multipronged strategy.

In addition to our core equity in breakfast, we're providing guests with enticing dining options across all dayparts as well as To Go. Building on a huge success of our steakburger platform launched in June 2018, we followed up with three all-new steakburgers last month as well as the recent introduction of an all-new line of house-made milkshakes.

And we continue to expand our all-day menu with last week's highly anticipated launch of our new buttermilk crispy chicken menu, which includes eight new items that range from sweet to savory and create guest appeal in all dayparts. The centerpiece of the new menu is our crispy chicken and pancakes.

With a $6.99 price point for a limited time, we're confident that our latest innovation will appeal to our guests, especially with those with an eye towards value. And most of all, these new items are all available to go as well. I'm pleased to report that we continue to see strong growth in our off-premise business.

Off-premise comp sales for the second quarter increased by approximately 39%, primarily driven by an approximate 26% increase in comp traffic.

Our fully integrated online ordering system through IHOP's enhanced website and mobile app had created an omnichannel experience for our guests and enabled us to grow our off-premise business to approximately 9% of total sales, up approximately 200 basis points from the second quarter of 2018.

We believe this additional growth potentials will continue to expand our delivery platform with national providers such as DoorDash, GrubHub and Uber Eats. We have over 1,300 restaurants utilizing DoorDash and approximately 1,400 restaurants or 83% of our domestic system that are partnered with at least one delivery service provider now.

And as Steve mentioned earlier, we made great progress with our delivery service providers on the cost structure. Lastly, catering is an opportunity for us to broaden our sales channels. We expect to begin rolling this platform out in the fourth quarter of 2019 where franchisees find it appropriate.

Our third initiative, being where the guest is, reflects our commitment to grow our off-premise business, which is underpinned by our development plan. There's continued demand for IHOP in new locations across the country, and we need to be wherever our guests are that support us in the appropriate numbers.

We will continue to develop new traditional restaurants but also nontraditional locations and a new focus on what we feel are underdeveloped, high-density urban markets. In assessing the development landscape, we believe we have ample room to grow over the next several years, which is to start contrast to much of the industry.

While we're not ready to make any announcements currently, we're confident that IHOP's growth is going to accelerate significantly. We'll share more details with you as they evolve. Turning to the fourth initiative, reinventing the guest experience.

Our deep consumer insight where it shows that guests consider many factors when deciding where he's dining, including what the atmosphere is.

Since the inception of the Rise N' Shine remodel program in 2016, our franchisees have made great progress on updating their restaurants to provide our guests with a warm and welcoming environment as well as drive traffic. In the second quarter, our franchisees completed 47 remodels, and we expect approximately 220 to be completed this year.

When combined with new openings, approximately 1,150 restaurants or 67% of the domestic system now have the remodeled image. Improving our guest experience in the restaurant technology is also a major focus for us.

We continue to expand our restaurant test utilizing new technology like the no way tool, enhanced Wi-Fi, handheld ordering tablets and wireless MV pay at the table to elevate the guest experience. We're currently testing in eight locations, and our goal is to have approximately 20 locations with this new technology by the end of Q3.

This is up from two locations at the end of last year. To wrap up, we are positive in our plan and ability to deliver against our objectives. IHOP posted at sixth consecutive quarter of positive sales growth.

We are very encouraged by the progress we've made in our off-premise business over the past year and continue to evaluate opportunities to maximize the brand's potential, including the rollout of the catering platform in late 2019.

Our culinary pipeline remains very strong, with a compelling combination of unique breakfast creations and a strong dining proposition. I'm very confident in our ability to build on IHOP's vibrant growth for traffic and sales increases in our existing restaurants as well as driving new restaurant development wherever we see the opportunity.

With that, I'll now turn the call back over to Steve for his closing comments..

Thanks, Jay. We are very much anticipating your leadership on driving further value for our customers at IHOP as well as accelerated growth plan as we've got in the next couple of years. So to recap, we delivered solid growth and total gross profit, adjusted EPS, adjusted EBITDA and continued to expand our margins.

Additionally, we achieved significant growth in adjusted free cash flow in the first half of the year compared to the same period of 2018. We've outlined specific plans of both brands to drive sustainable positive sales and traffic.

And I am confident in our strategy, which continues to deliver strong results as well as our team members and franchisees who are committed to our long-term growth plans.

We have additional opportunities for Dine to reach its full potential by expanding our off-premise business through catering, executing on initiatives to broaden our appeal across multiple dayparts and growing our domestic footprint through nontraditional and small-format restaurants.

I'm obviously very enthusiastic about the future for Dine and for our two great guest brands. Now we're pleased to open up the call for any questions that you may have..

Our first question we have is from Nick Setyan of Wedbush Securities..

Is there any further color you guys can give around sort of the Q3, Q4 and how you're thinking about the lower guidance with respect to -- just stick on Applebee's? And also the cadence of marketing you have in the second half progresses, how you're thinking about marketing relative to -- comparing Q3 versus Q4 as well..

Let me give a -- let me give you a little color from sort of the overall viewpoint, and then I'll have folks comment on their brands individually.

So obviously, based on performance, through the first half of the year, we're looking at -- on the Applebee's side, a very tough comp in the third, which was 77 last year, and then a strong finish to the year. IHOP is kind of the opposite. IHOP had a good third quarter but had a tremendous quarter with the branch promotion last year.

So obviously, we know we've got our work cut out for us to drive those positive comp sales. But in both cases, we have a much more aggressive value proposition planned through all of the programs that we're going to run between now and the end of the year, which we think will have a high appeal to both our loyalists as well as value-driven guests.

We think that in the position we've got -- for both brands, we've got additional marketing dollars allocated for the last half of the year versus the first half. So we think we've got a good plan, and we need to execute against it. Why don't I let John and Jay give a little bit more color on their individual....

Sure. Nick, the -- with respect to Applebee's -- this is John. The -- Steve referenced, from a media standpoint, I'd categorize Q1, Q2 being slightly down from a dollar perspective versus year ago. On the flip side of that, we're in a favorable position in the back half of the year, particularly in Q4, but that bodes well.

And I mentioned this kind of 20% of our guest population, the value seeker, this is our primary source of incrementality. And so you'll see us incorporate the learning, in particular, that we had around fajitas, and you'll see us be more overt and aggressive from a value perspective in the back half of the year.

We'd be foolish not to have applied that learning. Our confidence moving forward is significant. And also one of the benefits, one of the strengths of this model, as I've referenced often, we have 30 partners, and our ability to gather them in a room and meet and discuss tactics quickly and the course correct -- quickly. We've done that.

We met last week. The plans are in place. We're kind of loaded forbear regardless of the difficult rollover that Steve referenced in Q3..

I think on the IHOP -- this is Jay. I think on the IHOP side, we know, as Steve mentioned, we've got a big branch promotion we'll be rolling over, we think we've got a great plan in the second half of the year. We did just roll out our new crispy chicken, at a $6.99 price point for chicken and pancakes.

I think that should be a good traffic driver for us and help us out. And then we've got some more activations later in the year that everything for the rest of the calendar year, we have some type of value component involved in that. The first half of the year, we did a lot of abundant value. I think you hear abundant value is a great play for us.

It was very well received, but it's a different kind of value than -- more of a price point of value, et cetera. So we think we've got a great plan in the second half of the year to overcome the hurdles that we have, so we feel very confident..

And then on the Applebee's, your net closure guidance. I think in the first half where you had about 22 net closures system-wide, including international closures, the guidance is 20 to 30.

So how are you thinking about the second half? Could we actually come out of the year with a flat to positive type of net closure or net opening rate?.

Yes. So John wants to comment on those, but I think the way to think about it is the normal amount of churn for the Applebee's system should be around 15 to 20 units. And actually, we're hoping that by the end of the year, we've got new units coming in that would offset that.

And so we're working hard with the franchisees to create an environment where we begin growing the system again to offset those closures. There's two things coming into play, one is we've got some international closures that we think may happen, so that's driving a part of it.

And the other is we've got some agreed-upon terminations, which haven't happened and so -- and in part because the performance of the restaurants have improved. And so it's a little tough to gauge exactly where we're going to be, but we wanted to reflect where we think the sentiment is..

Yes. And I think, Nick, Steve hit it. Q4 is always tough to forecast when you approach the end of the year. But the great news here is when we look at it, we set out 2.5 years ago to close underperforming and brand-damaging restaurants. And we closed approximately 90 in the U.S. in '17 and another 90 in '18, it will be less than 30 this year.

And then, we'll be a net grower moving forward, a little bit in 2020, and that will accelerate meaningfully in 2021. That's a good new story for the brand. And our franchisees are optimistic about that growth. We've cleaned up or pruned up a lot of the brand-damaging issues that existed three years ago. They're nonexistent moving forward..

Next question, from Steve Anderson, Maxim Group..

I wanted to ask about your pace of menu price increases and when you've done any consumer research as to the consumer reception of menu pricing..

So again, let me start in general, and I'll have Jay and John kind of comment on their brands. So look, we believe we are entering in -- and have been actually, in a very price-sensitive environment for a lot of our customers.

And what we are trying to do in both brands is create an opportunity for people to invest up in their dining experience when they're feeling a little more flushed, but also know that they can go in and get a great value that's also equally compelling for a price point that's considered.

So what you're going to see us doing is adding more of the opportunities for good real value pricing, particularly within meat areas.

So -- and both -- those folks can talk about where that might occur, but that's what you're going to see from us driving customers into the restaurants in need periods through strong value propositions that we think are compelling to move people from ordering out or for delivery and into the restaurant because those offers will be made in restaurants only.

John?.

Steve, this is John. On the Applebee's front, we -- you tend to see a 1.5% to 2% annual pricing action on the part of franchisees. We're very cautious in this environment, with that, and we coach accordingly, historically in the category and across the industry, actually. You see an inverse correlation between traffic and pricing.

And so we know that we're a fundamentally value-oriented concept. And so if I were to quantify it for you, I would expect our annual pricing to remain in that kind of 2% range moving forward..

Yes. Steve, this is Jay. I think on the IHOP side, we look at this a couple of different ways. One is what is your core prices? What are your menu prices everyday? And obviously being a fully franchised system due to antitrust laws, et cetera, we can't dictate prices to our franchisees. They choose their own prices.

We can clearly give people guidance and give people suggestions on the way they should think about pricing and how it impacts guest traffic, et cetera.

We've actually started to use an RMS, a -- probably the largest pricing consulting group in the restaurant field, to give recommendations to each franchise location based on demand curves, et cetera, on products and how that works, and they're individual restaurant by restaurant.

So they give recommendations in the IHOP system as they print their menus to take certain amount of price in certain places and try to take in the right places where it doesn't impact traffic. So I think that's one piece.

The second piece is, clearly, from a promotional standpoint and how you drive traffic in these other dayparts, for example, I think one of the missions that I have is that we have to fill our empty seats, right? We have a great benefit of having a nice weight on Saturday and Sunday mornings on through the end of the afternoon in all locations.

We have a lot of dayparts over the 24/7 that most of our restaurants are open and that opportunity, so we have to think about that a little differently as far as what are the promotional prices and things we can do to fill those seats..

So I think overall -- and it's funny because when we were driving a lot of value last year, one of the questions we got from a lot of the analysts was, "Aren't you worried about declines in menu pricing? " And my response was, "Have you met our franchisees?" So our conversations with the franchisees are all about optimizing traffic as well as price because to John's point earlier, if you look at the industry over the last several years, clearly, taking check has been a detriment to traffic in the restaurants.

And what we want is a much more balanced approach. Now one of the big advantages we have to offset our labor cost increases, obviously, but we've got lower food cost this year than we had last year. So that's a big plus from us from the standpoint of our franchisees' profitability overall in the face of strong labor pressures.

So I think it puts us in a good position. And to Jay's point, and it's an important one and this is what we stress with the franchisees, look, when you bring in an incremental customer, that customer is profitable even on an aggressive price point. And plus, they might come in for others and they might buy a fully priced item.

So it is -- in any case, the aggressive price point menu items are a small portion of the overall items ordered.

And that's -- and so we talk to the franchisees about mix and about how to drive people into the restaurant and also how to optimize price point versus driving traffic because we think maintaining the traffic in the restaurants with a strong off-premises' growth pattern is a winning formula for us..

Yes. And Steve, just picking up on Steve's point, we all talk often enough about our supply chain organization. They are exceptional. This is a perfect example of scale.

We've got 3,400 assets and $8 billion in revenue across those restaurants, and that supply chain organization puts us at an advantage, in particular, relative to mid-sized and small-sized brands out there that just can't compete on the cost side the same way that we can..

Okay. Just wanted to touch on delivery a little bit. There's a -- one of the trade press articles about maybe one of the large franchisees pushing back on deliveries. I wanted to see if you can provide any comment around that..

Sure. Well, we have worked very hard over the last couple of months to make sure the profitability on delivery is the equivalent of profitability in-store and carry out.

So that included ways to work with our delivery companies that allowed for a strong relationship in terms of looking for those sales but at the same time, having the cost borne by the customer versus the restaurant.

And we think that's a winning formula for both the delivery companies and for us because long term, if delivery is not profitable and equivalent of profitability of -- in-restaurant or carry out, that leads us to price these channels, and we don't want to do that.

We want the customer to decide the channel they want, and so we've had those conversations. And for the most part, with the bulk of our delivery, we have accomplished a win-win scenario with those companies. Yes.

The economic model, and this is evolving rapidly, right? The economic model as it was originally structured with big delivery partners, it wasn't sustainable.

And we want comparable margin across all components of the business, and we're at a point -- and now the precipice of that being the case in every instance and every partnership that we have, that's good news. It allows us to leverage this incrementality. It's a highly incremental part of the business..

So it seems like the -- go ahead..

No. I was just going to say -- oh, go ahead..

Okay. But it seems like the conversation has changed at least in the last 12 months from have -- getting more the incremental customer. Now it seems like you're trying to get that customer to be profitable..

Yes. And let's be clear, it wasn't to say we're unprofitable. It was that they were not nearly as profitable as in restaurant or carry out. And so that's the balance that we move to strike, and we've now struck it..

Our next question, from Jeffrey Bernstein of Barclays..

Great. A couple of questions. One, just on the Applebee's side, just because you do have that very difficult compare that you mentioned. It seems like you're confident in a reacceleration in trend, but at the same time, I think you mentioned that the two year stacks are now cost stabilizing up five to six.

So I wanted to see if we can get any color on July or maybe what the compares are throughout the third quarter? Otherwise, it would seem to imply that the third quarter comp you'd expect to be maybe down a couple of percent, just to kind of keep you within that 5 to 6 2-year stack. And then I had a follow-up..

Jeff, I don't want to comment on Q3 other than to say the fundamentals are really good here right now. We look at Q3 of last year, there's not another brand, certainly in casual dining that posted a quarter like that, and I think there's only one other brand in the restaurant industry that posted a quarter in excess of that. So yes, it's a big hurdle.

That five to six range is our current kind of trajectory, wouldn't attempt to forecast beyond that because there's so many variables. But again, re-course corrected in our tactical approach here in Q3 and Q4..

Got it. And then in terms of the Applebee's franchise profitability, it sounded as if I think you said that the commodity basket -- I think you said it was up less this year than it was up last year or whether it was down.

But just wondering if you can provide any color in terms of their basket on commodity and labor inflation in terms of maybe overall profitability. I'm just trying to get a sense for how they're feeling, especially if you're talking about a big uptick in value in the second half..

Yes. So two things on that. It is down. And so for Applebee's, call it, we think overall price is going to end up about 280 basis points lower than last year. So -- and then the thing to think about these promotions that we're running is they're actually a relatively small proportion of what gets ordered in the restaurant.

And so that's why we like the idea of having doing things to get customers' attention to bring them into the restaurant. But then in most cases, what we're seeing is there are certainly people taking advantage of it, but they're also coming in and ordering other things..

Tom, you want to talk about....

Sure. Yes. As Steve mentioned, we monitor a basket of commodities that each of the individual restaurants purchases on an annual basis. So year-over-year, the 2019 number looks to be about 2.8% lower than last year. On IHOP side, the decrease is a little bit more modest, but regardless, it's a decrease that they're seeing of about 70 basis points.

Those, we believe, provide a nice offset to increase labor cost. On that front, what we do is we monitor franchisee four wall profitability on a quarterly basis. We collaborate very, very strongly with the franchisees on looking at improvements in this.

As John alluded to earlier, this is a multiyear execution that we have on improving that four wall profitability. We're probably now kind of midway through that improvement cycle. And so there's still some costs to be taken out, a lot of it operational, not only related to commodities and supply chain but also on the ops side..

And I would add, Jeff, the -- on this restaurant profitability initiative, let's start with PwC. We don't just see on the Applebee's side 100 basis points this year will exceed that. We see that next year as well and then some additional opportunity on an annual basis moving forward. It's now just kind of a component of our annual business cycle.

We not only have to drive revenue on the top line, we leverage our supply chain organization but then we seek to find another 100 basis points through some deep cross-functional work that won't compromise the guest experience. But it's primarily food and secondarily, labor. Again, a point of difference that we are leveraging across both bands..

Yes. This is Jay. We're doing the exact same initiatives on the IHOP side, with our purchasing co-op and the revenue management are the profitability projects. So the numbers are a little less on the IHOP side. Again, it's a different market basket. So if you -- we've got about a 0.7 reduction in cost as far as the market basket at IHOP.

Again, the products are a bit different from each other. We lean heavily towards what's pork is doing, what are eggs doing, what are grains doing, et cetera. Just thinking about the product mix of what we sell.

But I think the way to think about it is there is a multipronged strategy surrounding franchisee profitability.

So the franchisee profitability on the last review that we did is moving into closer to what peak years look like while we're not quite there yet, so -- but think for average rough volumes that are sort of in that low double-digit territory. So that's -- we're working on that.

But because we need to continue to push the profitability for the franchisees, there are series of 20 different initiatives, which include product that requires less labor in the kitchen, fewer skews in the kitchen that make the execution simpler, driving labor hours down through technology.

So there is -- I can give you -- pushing more customers through the restaurants because of a no-wait system, and in each case, which is also a benefit to us, for those customers to take advantage of paying at the table, order at the table, order in advance. There's just a number of initiatives that we've got.

Those all allow us to get to know the customers better because the customers provide certain information. So there's a two-prong benefit, one is on the profitability side, and the other is gaining the ability to market one-to-one to our guests. And so -- and we have learned from this.

We are halfway through the journey, but we've got high hopes for the relative effect of that and its impact on the profitability of our franchisees..

Our next question from Brian Malone [ph] of Deutsche Bank..

I was hoping you can maybe speak broadly about M&A and other brand.

Does it have to be a concept that's already franchised or that you could franchise concurrent with the transaction? Will you be willing to operate a restaurant or restaurants for a period of time for the right brand?.

Yes. Let me start, and Tom can add some commentary as well. So yes, we've made it clear and we believe scale matters in this business, so we'd like to add additional brands. We want to do it in a way that it's disciplined, that is a -- it is a calculated bet but not a huge one.

So we've described that in terms of roughly $100 million, 70 unit to 100 unit chains. They all had a tendency of look in their development, pretty similar. And that is they start out with company-operated to prove the concept and then once they get into that 50 to -- 40- to 50-unit category, they start doing some franchising.

And obviously, based on their experience, some are more -- or quicker to move to franchising than others. But the way that we expect, if we land on a transaction, which, by the way, needs to be immediately accretive and needs to be in a category that we think has real growth opportunity to it. So our focus is fast casual.

It's not the only thing we're looking at, but it is a focus on fast casual and in growing segments of different type concepts.

So the way I think that we're thinking about it is we want to find a strong brand, which our franchisees want to grow, because one of the benefits that we bring to a new brand, with the ownership of that brand, is we bring a ready group of franchise operators and owners who are well capitalized and are looking for additional growth opportunities.

So in addition to that, we have a huge franchise machine, which we can leverage. And so between that and capital, that's really what -- if you think about it, and operating expertise and procurement expertise, that's what we can bring to our new brand if you really help accelerate their growth.

And that is the opportunity we want to look at, a high-growth type opportunity that our franchisees want to participate in and that we think we can turn into a significant component of Dine's overall EBITDA over time..

Yes. Steve, I will just add one thing on the platform. Brian, I think you're well aware, we have one of the larger platforms when it comes to casual and family dining, but the platform is a little bit different in that we are for all intents and purposes, almost purely franchise.

The one other significant lever when it comes to multiple brands is our technology capabilities. So it's not insignificant the amount of technology that we need to bring to bear with respect to each of these brands.

And so we think that's another advantage when we bring on other brands is that you have single platform with multiple implementations of the technology on behalf of franchisees. When it comes to the process and where we are, frankly, over the past year, we've taken a look at a couple of hundred different types of concepts.

We go through a screening process, no different than any other investment process. And at any given time, we're closely looking it's a combination of quality of opportunity, having hopefully an entrepreneurial-led team or an entrepreneurial team that's in place.

And as Steve mentioned, one of the areas that we're particularly interested in is fast casual. It provides a nice complement to our casual dining and family dining existing presence..

Okay. That's so helpful. And then last one for me, on the share repurchase notable activity in the quarter, as you guys referenced.

Can you just remind us of the philosophy on consistent versus opportunistic, and then maybe the upper bound of leverage that you're comfortable with as we try to think about potential pace moving forward?.

Sure. The pace, really, is kind of indicated on what our Board authorized earlier this year, which was a $200 million share repurchase authorization. We thought that, that might need two to three years in the making, so to speak. And so that kind of indicates what we're thinking over the course of the next few years.

Leverage-wise, we continue to delever, so that's one of the points I'd made is that quarter-over-quarter, sequentially, we did delever even though we did a new financing, even though we did more repurchasing during the quarter than all of last year.

And so our free cash flow, we believe, supports the level of share repurchases and dividends, capital return to our shareholders sufficiently..

And if you recall, one of the things that we did initially was we had added a dividend based on a previous stock price that seemed a little out of character. So we reduced that dividend. But at the same time, I said we were going to reapply based on opportunity those dollars to share repurchase, which is precisely what's happened.

So -- and then just in terms of we are not a programmatic buyer. We are a buyer when we believe that there's value to be achieved in the stock. However, I will say, obviously, we believe, based on our activity to date, that there is value to be achieved from the stock..

Our next question comes from Brian Vaccaro of Raymond James..

Just wanted to circle back with a view on the Applebee's comps. You had a comment about the monthly cadence in the second quarter, and you mentioned one month was negative.

Could you confirm that, that was April with a return to positive in May and June?.

I think that's a safe assumption, Brian. We referenced the kind of that one month in Q1, which everyone knows the industry felt that in the month of February. And then April would be an accurate assumption in Q2..

Okay. And John, I think you also said that the last seven weeks of the loaded fajitas that the Applebee's returned to outperforming the industry was very encouraging to hear. I think you said that the fundamentals -- that's about the quarter-to-date is not really good.

Am I interpreting that correctly to suggest that Applebee's is sustaining this return to outperformance versus the industry?.

Brian, I was referencing very specifically to be clear the six to seven weeks that we were promoting fajitas. It was kind of that May/June time frame. And during that six to seven weeks stretch according to Black Box, we did outperform CDR. And honestly, I haven't looked at it lately, there's always a two week lag on that.

But generally speaking, if you look at the year, we've been kind of moving with casual dining with a slight outperformance. But it's highly volatile, and we're lapping big numbers the way Black Box looks at that, and our competitors are lapping modest numbers..

And on those laps, if you go back to the [indiscernible] in Q3 of last year, could you remind me, was there a deceleration through the quarter? It's fairly stable.

Can you just give us some context on the compares moving through the third quarter?.

Brian, I'm reluctant to do that. I recall -- I don't have that in my head, so I don't want to give you bad information, but it's a pretty stable quarter. And there wasn't a poor -- poorly performing month in that quarter. I believe there was one that was a slight over performance to the [indiscernible] average. But we wouldn't parse that out..

Okay. Fair enough. And one last one on the Q2 comps, if I could.

Could you just give us an update on Applebee's alcohol sales mix in the second quarter, and maybe just an update on how the monthly alcohol promotions are performing?.

We love our Neighborhood Drink of the month, we love our dollar price point in particular, we love the incrementality and kind of the light user and the demographic profile that comes associated with that. While it may be a very, very small percentage of dollar sales, the food associated with those tickets is substantial.

So we like where we are, we continue to be in that 14% to 15%, call that 14% range with alcohol mix. And we look at that as a primary driver of incrementality and for light users..

Okay. That's helpful.

Switching gears, just the franchisee profitability, and I'm sorry if I missed it, my phone kind of glitched out, but did you say -- or I guess can you confirm that four wall margins improved year-on-year for the average franchisee in the second quarter?.

We're not going to confirm that. What we're saying is that in monitoring the profitability of the franchisees at this point versus previous points in '18 and '17 is clearly move back up into a territory that is in the double-digit range, low double-digit.

And that we believe we're going to continue to drive additional profitability so that we can get the franchisees back to those peak levels..

Yes. Brian, just 2 points that will help you on this, one being that we do monitor, as I said earlier, four wall profitability but there is a little bit of a lag because, again, these are franchisees' financial reports that we're monitoring. The second thing is -- really the leading indicator is effective rates here on -- or collections here.

So if you look at Applebee's year-to-date, 2019 as compared to 2018, we're talking about nearly 20 basis points higher on collections here. So hopefully that helps also give you some indications..

Yes. Okay. That is helpful. Last one, just on profitability in the franchises and the cost savings. Could you talk a little bit more, maybe a little bit more color on the labor savings initiatives and I think server handhelds and maybe some back-of-house changes that are driving those savings? But -- if you can tackle those for us.

And just how do you expect those savings to flow through over the next several quarters?.

So let me start, and we'll have John comment. But -- so the way I think about it is we have done a lot of work around driving product costs down, in some cases, by replacing the existing product and also looking at opportunities to provide less required labor in the restaurant. So for example, one of the first things we eliminated was steaks.

And we ended up getting a better product that the customers liked better, that's more consistent, and it took labor out. But it's not 1 silver bullet. There were literally hundreds of those ideas we viewed and thought through by PwC and there were -- some are bigger than others.

But the whole thing is it's a broad-based program where we are either looking for more competitive product that the customers would like just as much and also opportunities for less prep in the kitchen itself and simplifying the execution of the menu through reduced skews and a much more simplified process of preparing the foods.

On both sides of the coin, one of the reasons our consistency has improved so significantly and our customer satisfaction with the food product is because of that simplification so they can execute better.

John?.

I think Steve nailed it, Brian. We don't do anything. This is the guiding principle, number one to compromise the guest experience, just don't do that.

The -- many of the kind of opportunities that you referenced on the labor side coming from some of the food, there's labor that has been deployed and food prepped that if we can kind of remove that from a restaurant-level burden without compromising anything, we will do so. And this doesn't even take into account technology.

I would anticipate while we're actively testing handheld -- server-handheld units, which will favorably benefit labor, we will only roll that when we have in our business case. You can expect news on that when we get to Q4 or Q1 of next year..

Yes. But the other thing to think about is, again, there are literally 10 to 15 different technology approaches that we're looking at and testing. Because if you eliminate the server -- actually, hand them the check and pay on your own device, clearly, there's labor savings there.

And also a higher degree of satisfaction because customers aren't waiting around to get their credit card punched. So you've got a series of -- handheld's probably the biggest one which would directly impact labor because servers can do a lot more tables, and they don't go back to the kitchen. So they're never out of the floor. Everybody's happy.

So win-win..

And then, Brian, the other part of the Applebee's side, I think we become very good at identifying best practices. And so we have varying levels of sophistication among our franchisees.

And when it comes to labor modeling and scheduling, those who do this well, we managed to share those best practices with the balance of the system, and they deploy those, which has some financial benefit. We're becoming far more efficient in how we execute..

And that concludes our question-and-answer. We will now turn the call back to Steve Joyce for closing comments..

Well, thanks very much for your interest and participation today, and we'll be excited to share more progress with you next quarter. Have a great day..

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