Earnings Call: Q4 2019

Feb 24, 2020

Welcome to the Q4 2019 Dine Brands Global Incorporated Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Ken Dipte, Executive Director of Investor Relations. Good morning, and welcome to Giant Brands' 4th quarter and full year conference call. I'm joined by Steve Joyce, CEO Tom Song, CFO Jay Zhang, President of IHOP and Sean Cywinski, President of Applebee's. 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 differ 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 ks filings. 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 Pine Branch website. With that, I'll turn the call over to Steve. Thank you, Ken. Good morning, everyone, and welcome. At Dine Brands, our strategic focus and strong alignment with franchisees continues to create substantial value for our shareholders and provide our guests with even better dining experiences. This past year was defined by several significant achievements, despite facing a competitive marketplace and the increasing importance of value in our pricing. Notably, we successfully completed a $1,300,000,000 refinancing of our existing long term debt with very favorable terms. Additionally, our ability to generate robust adjusted free cash flow enabled us to raise our quarterly cash dividend by 10% a year ago, as well as continue our solid track record of returning cash to shareholders through stock repurchases. As announced this morning, we further raised our dividend by 10%. We accelerated strategic domestic development initiatives, which resulted in the largest multiunit development deal in IHOP's history. We signed meaningful international development agreements, which will continue to fuel our growth outside of the US. Our most recent deals will expand our footprint in Latin America, Eastern Canada, India, and Pakistan. We launched several digital initiatives across both brands in 2019, including new and enhanced ordering capabilities to make it easier for our guests and to support the growth of our catering business. We see catering as the next area of growth for both branded delivery at both Applebee's and IHOP via their respective websites and mobile apps through a partnership with DoorDash. We also improved our delivery partnerships on behalf of our franchisees so that in restaurant carryout and delivery sales have roughly the same profitability. These accomplishments, amongst others, resulted in a 24 percent increase in our stock price for 201940 percent year to date. These achievements were made possible by committed franchisees who made the necessary investments in their restaurants, their team members who provide a better experience for our guests each day, and the people throughout our organization who made data supported, guest focused decisions around new products, new technologies and other restaurant innovations that propelled our business forward. Thank you for your dedication and hard work. Turning to our Q4 financial results. As you saw in our press release issued this morning, we delivered another quarter of solid growth across key metrics, including adjusted EPS and adjusted EBITDA. Importantly, we also achieved a meaningful improvement in G and A compared to the Q4 of 2018. We will continue to closely manage our G and A, which is an important lever for Dine Brands, especially given our attractive asset light model. We are operating from a position of strength, and we're prepared to capture growth opportunities in the marketplace. We believe our momentum can be sustained by addressing significant unit development opportunities and leveraging technology to enhance the experience in our restaurants as well as through off premise. Additionally, we have expanded our pipeline of new products and elevated our marketing relevancy. Our ongoing menu innovation and creative advertising across both brands provides guests with even more reasons to visit Applebee's and IHOP. Switching gears briefly to the performance of our brands, 4th quarter domestic comp sales at both Applebee's and IHOP performed in line with our expectations despite continued sales traffic volatility in casual dining and family dining according to public industry data. I would like to highlight that our asset light business model makes us generally more resilient to fluctuations in comp sales trends. Looking ahead, the outlook for Applebee's and IHOP is promising. We're extremely franchisees. Regarding IHOP, incremental growth from unit development represents a significant opportunity at a time when demands for the brand from franchisees and consumers remains high. Both Jay and John will provide more details on their respective brands a little bit later. In closing, Dine's fundamentals remain strong, and our core business is healthy. We are successfully executing against a comprehensive strategy that is focused on growing the business and creating shareholder value. By engaging our guests on their terms, whether it's through delivery or an enhanced dining experience in our restaurants, our brands will continue to focus on innovative solutions that further elevate the guest experience and drive sustainable profit growth for both Dine Brands and our franchisees. We've created a high performance value based culture focused on 3 core principles of people, brands and growth. We've elevated and added valuable experience and talent across the organization, notably the promotion of Jay Dons to President of IHOP, which was very well received by our franchisees. Jay has been an integral part of the success of IHOP for the last 7 years and he hit the ground running to ensure a seamless transition. We have really made the development of our team from recruitment to leadership development and succession planning one of our highest priorities. We truly value, encourage and recognize the diversity, inclusion of all team members because they are the foundation of our brands and take pride in their jobs every day. With that, I'll now turn the call over to Tom to provide an overview of the financial results. Tom? Thank you, Steve. Good morning, everyone. I'm very pleased to report that we continue to deliver year over year improvements in adjusted EPS and adjusted EBITDA. Our performance for the Q4 and full year highlights the ability for Dine to perform and be agile despite a competitive market. With our franchise business model, we're able to return capital to shareholders and invest in our brands and technology. I'll briefly recap the highlights for both the Q4 and 2019 and provide some high level comments on our performance. I'm pleased that Dine was able to finish the year on a strong note, with our adjusted EPS and adjusted EBITDA results being in the top half of our guidance range. We continued to prioritize the return of capital to shareholders, while at the same time decreasing debt leverage from 4.57x from 4.9x in 2018 as a result of continued EBITDA growth. Later, I will provide an overview of our guidance for 2020, which reflects our solid fundamentals and stability of our business. Turning to our financial results, I'll begin with the notable changes on the income statement. For the Q4, adjusted EPS was $1.78 compared to $1.70 for the same quarter of 2018. For fiscal 2019, adjusted EPS grew approximately 29 percent to $6.95 compared to $5.37 in 2018. Higher gross profit, an increase in the number of IHOP effective restaurants due to positive net development, and IHOP's domestic comp sales growth all contributed to the increase year over year. Switching gears to G and A. Given our asset light business model, G and A remains an important lever for us as it constitutes 26% of our total revenues, excluding advertising revenues, and 33% when further excluding company owned revenues and related G and A. Our G and A for the Q4 of 2019 improved to $41,700,000 a $3,600,000 improvement from last year. The decline was primarily due to lower compensation and a decrease in professional services costs. G and A for 2019 was $162,800,000 which beat the low end of our guidance range. This compares to $166,700,000 in 2018. As a reminder, G and A included over $5,000,000 of costs related to company restaurants. In both the Q4 and for the full year, it's clear that our careful management of G and A contributed to our favorable financial results. Regarding our tax rate, our GAAP effective tax rate for the Q4 of 2019 was 25%. For the full year, our GAAP effective tax rate was 24.6%. The 2019 effective tax rate applied to pretax book income was higher than the statutory federal tax rate of 21%, primarily due to unrecognized tax benefits and incremental state and local income taxes. Turning to the cash flow statement. Our highly franchised model continues to generate strong adjusted free cash flow. This allowed us to return significant cash to shareholders through share repurchases and dividends, which I'll discuss later. For 2019, adjusted free cash flow was $149,000,000 compared to 141,000,000 dollars for 2018. The favorable variance was primarily due to an 11% increase in cash from operations. Regarding the improvement in adjusted EBITDA, consolidated adjusted EBITDA for 2019 was 273 point $5,000,000 compared to $230,600,000 for 2018. The 19% increase was primarily due to improvements in both total revenues and gross profit in 2019 compared to the prior year along with previously mentioned G and A Management. Because of our asset light model and low CapEx requirements, we have very high quality adjusted EBITDA. Despite a 36% increase in CapEx to $19,400,000 for 2019, primarily driven by investments in guest facing IT initiatives, CapEx still represented only 7% of adjusted EBITDA. Switching gears briefly to creating value for shareholders, the return of capital to shareholders remains a top priority. In 2019, we returned a combined total of $157,000,000 to shareholders. This compares favorably to the $85,000,000 returned in 2018. In 2019, we paid $47,000,000 in quarterly cash dividends and repurchased over 1,300,000 shares of our common stock at a total cost of 200 of total cost of $112,000,000 This morning, we announced an increase in our quarterly cash dividend to $0.76 per share, a 10% increase. Lastly, I'll review the highlights of our financial performance guidance for fiscal 2020. Please see the press release we issued today for complete details. We expect comp sales at Apple Beach to be between 0% and positive 2%. At IHOP, we expect comp sales to be between 0% and positive 2%. Total segment profit, which excludes the company restaurant segment, is expected to be between $385,000,000 $395,000,000 We expect net closures of between 0 10 domestic Applebee's Restaurants. At IHOP, we expect some upside to development compared to prior years, with projected net openings to range between 40 50 new domestic restaurants. G and A is expected to range between $170,000,000 $175,000,000 including non cash stock based compensation expense and depreciation of approximately $45,000,000 Please note that this range is inclusive of $5,000,000 of G and A related to the company restaurant segment. Consolidated adjusted EBITDA is expected to be between $275,000,000 $285,000,000 inclusive of company restaurant segment EBITDA, which is expected to range approximately between $9,000,000 $11,000,000 Lastly, adjusted earnings per diluted share for 2020 is expected to be between $7.08 $7.28 To wrap up, by several measures, 2019 was a successful year for Dime despite facing a challenging and competitive market. While there is a lot of work ahead of us, we achieved several significant accomplishments, which laid a solid foundation for success. I'm particularly proud of the completion of our securitization and the great progress that has been made on franchisee financial health. We continue to closely monitor our franchisees and support their 4 wall profit expansion, while offering compelling development opportunities. With our continued execution of several strategies to deliver top line and bottom line growth, I'm very optimistic about the year ahead. I'll now turn the call over to John. Thanks, Tom, and good afternoon to those of you on Eastern Time. We expected Applebee's Q4 to be a challenge given our success in Q4 of 2017 and Q4 of 2018. This 2 year comp hurdle of +4.8 percent was the highest we've seen since 2012. As a result, we closed Q4 of 2019 with comp sales of minus 2.5 percent and Applebee's full year 2019 comp sales were down 0.7% while rolling a +5 percent comp from the prior year. Now, while Q4 was a challenging quarter, 2020 has marked a return to positive comp sales as our momentum has shifted considerably through the 1st 8 weeks of this year. With Applebee's having reestablished its value leadership position in the market. I thought this context was important to share on today's call, although I'll reserve additional detail until we report Q1 in its entirety later in April. As stated previously, I believe Applebee's is poised for consistent growth moving forward for several reasons. 1st, we concluded our strategic initiative of closing approximately 200 underperforming assets. Said differently, we pruned up the U. S. System of brand damaging restaurants over the past 3 years and will now target no more than 10 to 15 closures per year. Also, after 3 years of navigating royalty and advertising bad debt, we begin 2020 with a healthy franchise system and no material delinquencies. This is a very important milestone and ensures a far more stable and predictable income stream as well as a fully funded 4.25 percent national marketing plan. Additionally, our franchise partners are 100% aligned around Applebee's brand essence and our need to remain relevant among value seekers throughout the year. This provides great clarity as we develop and execute our tactical plans here in 2020. Finally, we fully intend to leverage our scale in terms of media muscle, supply chain and our large franchisee business model. These are meaningful points of difference that smaller brands and independent restaurants simply don't have at their disposal. Now let's turn to restaurant P and Ls. Our cost reduction initiative is now beginning its 3rd year and the results are clear. We achieved a 65 basis point reduction in 2018, followed by an impressive 135 plus basis point reduction last year, much of which will benefit restaurant P and Ls here in 2020, given the staggered timing of implementation. Most of these savings are food related with a focus on commodity renegotiation and operational food cost management. Some of the savings are also related to off premise packaging. And with respect to labor, we partnered with franchisees to implement best practices around disciplined forecasting and scheduling as well as just in time portioning, which eliminates some prep hours throughout the week. And with server tablets soon to be deployed in about 400 restaurants, we continue to offset labor pressures, particularly in high wage geographies. Now we'll be smart and methodical here and be sure to fully optimize this initiative before expanding to additional restaurants. Our 2020 cost reduction target is an additional 75 basis points, which puts us on track to ultimately exceed the initial 300 basis point objective that we established with PwC. Directionally, about 2 thirds of these savings will flow to our franchisees' bottom line, while 1 third will be reinvested in very specific menu quality improvements. Now on the portfolio front, we continue to own and operate 69 restaurants in North and South Carolina, and I'm proud to say that these restaurants have consistently outperformed our system average, posting positive comp sales in 2019, their 1st full year under company ownership. In total, Applebee's now has a base of 16 60 plus restaurants and 32 franchise partners in the U. S. As with the past few years, we plan to continue refining this portfolio for maximum performance. As part of this optimization, I anticipate a handful of entity transactions here in 2020 as we continue to introduce a select number of new well qualified franchisees to the brand, while also providing growth opportunities for our best franchisees via strategic acquisition. With each transaction, we continue to narrow our operational variability, while elevating guest metrics such as overall satisfaction and brand affinity. Based upon these metrics, I can say with confidence that Applebee's fundamental brand health is stronger than it's been in years. Let's shift to a brief overview of our off premise business. After 32% growth in 201822% growth in 2019, I expect off premise comp sales to naturally moderate at this year 2020. Of our 13% off premise mix, Carside 2 Go is a very stable component at 9% to 10% of mix or about 70% of the total off premise business. Delivery represents the balance of our off premise mix and continues to grow at a healthy clip, although I anticipate this delivery growth rate to slow as penetration matures and guest adoption stabilizes. From my perspective, this means more of a marketing driven growth dynamic and less of a penetration driven growth dynamic in the category, which bodes well, very well for Applebee's. As referenced on past calls, I believe we're best positioned in the off premise market given our menu variety, value orientation, operational improvements, youthful demographic and the fact that we're generally right around the corner with more than 1600 locations. Simply stated, Applebee's wins the convenience battle over the long haul. To reinforce this relevance, we just posted our highest digital sales day ever 10 days ago on Valentine's Day. In summary, you can expect a steady cadence of value and innovation from Applebee's in 2020 as we leverage our big brand scale, improve unit economics, and most importantly, hold our franchise partners accountable to the highest standards of restaurant excellence. With that, I'll turn it to Jay. Thank you, John. Good morning and afternoon, everyone. IHOP delivered an impressive 1.1% in comp sales for the Q4, rolling over our strongest quarter of 2018. This marks the brand's 8th consecutive quarter of positive comp sales growth. I'm also proud to say that we posted positive comp sales in every quarter of 2019, which is particularly meaningful given that we lapped over some of our most successful launches in recent years, including the launch of our Ultimate Steakburgers platform and the award winning Grinch inspired limited time offer, which led to our highest quarterly comp sales increase since the Q3 of 2015. During the Q4, we followed up on our 2018 tie in with the Grinch animated feature film with not one, but 2 beloved family centric entertainment property partnerships. First, we kicked off the quarter with a limited time menu tie in with MGM's animated film, The Addams Family, which resonated with guests of all ages. Then our connection with Addams Family movie was followed by a holiday inspired Elf on the Shelf promotion, a first of its kind restaurant partnership for the Elf property. Both the Addams Family and Elf on the Shelf tie ins featured fun food and our popular kids eat free offer further underscoring our commitment to create unique craveable menu items and strategically leveraging value. The success of these programs demonstrates IHOP's iconic strength, the affinity guests have for IHOP and growth opportunities for the brand. While we're pleased with our achievements, there is more that can and will be done to sustain IHOP's positive sales momentum and aggressively grow the business. We want our guests to continue to view IHOP as having great food, a great value proposition, and a great option for both dine in and to go. Our strategic plan is squarely focused on defending and growing the business. To achieve this, we continue to focus on our 4 key areas, which are running great restaurants, driving traffic, being where the guest is and reinventing the guest experience. The ability to defend our leadership position is underpinned by 2 of the most foundational priorities, running great restaurants and driving traffic. Running great restaurants helps ensure guests come back more often. To do this, we've sharpened our focus on operations, training and technology that improves efficiency in our restaurants. As a result, our guest metrics continue to improve. Over the last 2 years, we've also conducted a thorough review of our domestic system and provided extra attention to those restaurants and franchisees whose performance ranked in the bottom 10%. As a result, we've taken actions to address the underperformance and ensure the long term sustainability of IHOP's sales momentum. Switching gears, driving traffic is more relevant now than ever. IHOP has been the leader in family dining for over 10 consecutive years based on domestic system wide sales. We believe our competitive advantages provide a significant opportunity for us to grow by taking share from the competition and attracting their guests into our restaurants. We're doing this in a variety of ways. We're increasing our mix of digital advertising to more effectively reach our younger consumers. One of My House's many advantages is our favorable guest demographics. Over 50% of our guests are aged 34 and younger, compared to an average of only 31% for our family dining peers. Additionally, we're leaning into value centric price points and attractive deals during non peak hours. For instance, we started the year by bringing back our popular all you can eat pancakes and paired it with any breakfast combo. We've also introduced a weekday 2x2x2 offer that includes 2 eggs, 2 pancakes and the choice of 2 sausage wings or 2 hickory smoked bacon strips for only $4.99 We're committed to providing our guests with relevant value as one offer leans into abundant value and one at a competitive price point to increase frequency, particularly to enhance traffic on weekdays to balance our traditional strength on weekends. We understand what guests want and expect from IHOP. Our primary focus is on culinary innovation, which has enabled us to produce a 2020 marketing calendar full of new and exciting food that continues to layer in value, strategic partnerships and expanded platforms. We're using key learnings from successful promotions to develop relevant offers and then entice guests to come in more often. Our culinary approach, coupled with deep consumer insights, also feeds a tested menu pipeline that allows for flexibility to respond to potential competitive threats. To that point, to meet our goal of driving traffic, we're focusing on taking share from the competition. We'll do that by being on our guests' minds and in their path. We continue to refine our strategic mix to break through the clutter, differentiate our brand and leverage data to better reach IHOP guests with messages that are compelling and relevant. In Q4 2019, we also announced the next phase of our off premise strategy with the rollout of catering. Today, almost 900 restaurants have signed up for catering, adding one more way for guests to experience IHOP. We also continue to expand the number of restaurants offering delivery through 1 or more of our 3rd party service providers, bringing the total number of participating restaurants to over 13 50. To go, delivery and now catering provide us with additional growth levers. In Q4 2019, off premise made up about 10% of total sales, reflecting an improvement of approximately 200 basis points compared to the same quarter last year. Since convenience is the number one factor in a guest choosing where to eat, we have to be in the guest path. This means growing restaurant footprint in high impact areas. We're proud that IHOP has a stable history of net unit development. In fact, over the last decade through 2019, our franchisees developed an average of approximately 61 gross restaurants and 40 net new restaurants annually. No one else in the family dining category has a similar development track record like IHOP. Late in 2019, we announced 2 development deals that we believe will have upside for the brand in the coming years. The first was a nearly 100 restaurant deal with TravelCenters of America in October, making it the largest multi unit development deal in IHOP's history. These restaurants are expected to open over the next 5 years with approximately 15 planned for 2020. Additionally, in December, we announced plans to launch a new fast casual concept in the spring of 2020 called Flipz by IHOP. This fast casual concept will feature an all day menu inspired by IHOP favorites and will directly address growing consumer demand for fast quality breakfast options in densely populated city centers. Phillips will also have a heavy focus on to go, delivery and technology. In addition to quickly expanding our non traditional development with our travel centers deal, we also plan to continue building traditional IHOP restaurants. In addition to new growth, we also plan to close a limited number of underperforming units just as a part of a routine course of business. With a robust development plan in place, we are confident that our growth in 2020 will be stronger than 2019. To wrap up, I'm very pleased with our Q4 and full year comp sales performance. We have well defined plans in place to defend our core business and grow the brand, which have delivered positive results and will fuel our momentum in the year ahead. We've also taken strategic steps to drive further upside in IHOP's unit development potential while pushing further into off premise and PM growth. To close out my remarks, tomorrow is IHOP's National Pancake Day, our signature annual giving campaign that supports Children's Miracle Network Hospitals. Since 2006, IHOP and our franchisees have raised more than $30,000,000 for our charity partners during this campaign. Now in its 15th year, we've upped the excitement of National Pancake Day by adding an inter restaurant sweet steaks component that we believe will be a big draw for IHOP fans. We invite you to join us tomorrow at restaurants nationwide. With that, I'll turn the call back over to Steve for his closing comments. Thanks, Jay. To briefly recap, we ended 2019 with strong results and continued to deliver year over year improvement in adjusted EPS and adjusted EBITDA despite a challenging environment. The year was highlighted by several notable achievements, each of which lays the groundwork for future success, which makes me very enthusiastic about the road ahead. We're seeing the tangible results of the heavy lifting that's been done over the last 2 years to improve the core business, such as the significant growth in adjusted free cash flow during this period. Our asset light model continued to generate substantial free cash flow, which enabled us to return roughly $157,000,000 to shareholders through quarterly cash dividends and share repurchases in 2019. By all of these measures, Dine has performed very well, and we are enthusiastic about our ability to succeed in 2020 beyond as we remain focused on our key business priorities and creating value for our shareholders. I'm very pleased that we were able to deliver another strong quarter of solid operating results. Now with that, we'd be pleased to open up the call to any questions. Operator? Thank you. We will now begin our question and answer And we have our first question from Nick Setyan with Wedbush Securities. Thanks for the directional commentary on Applebee's quarter bit. I think that was very helpful. I think there was a sense that last year, maybe the system at Applebee's took a little bit more pricing than maybe relative to the category. Would you say that kind of looking out into 2020 that the franchise are pretty much on board with perhaps a little bit more control when it comes to the price increases? Hey, Nick, this is John. Yes, good insight on your part. We love our position in the market. Our franchisees, they're smart, savvy operators. We're loaded for bear in terms of our price positioning in the market, our tactical plans. And they're well aware of that guest profile, which is a value oriented consumer, and everything we do is geared toward that consumer. So to answer your question very directly, yes, we like our position. And I think to add to that, Nick, this is Steve. I think what we have learned convincingly, and the franchisees are 100% aligned with us, is when we are on our game plan and providing abundant value at aggressive price pointing, we are going to win in the marketplace. We demonstrated that last year and we're demonstrating it year to date. So think we've got a great plan for the year on both for both brands. Both of them and both of our brands are known for the same thing, abundant value and very aggressive price point. And when we stick to that plan, we're going to be successful. That's helpful. And then on the unit growth front, I thought Applebee's net unit growth guidance was actually pretty impressive. Is there anything that we're doing on the maybe on the incentive front to if not yet, at least how are we thinking about maybe making the incentives even more attractive for franchisees to maybe accelerate unit growth, if not in 2020, but 2021 and moving forward? Yes. So good question. I think, obviously, we have not pushed development in the last couple of years at Applebee's for all the apparent reasons. We are now in a position to do that. Franchisees, a number of them are talking to us about new unit development. We have several under development as we speak. And yes, we plan on incenting significant development over the next couple of years, both with the existing franchisees, but also bringing in some new franchisees who want to grow with us. It's an interesting discussion when we go to these conferences, the relative interest of not only existing franchisees, but more importantly, a number of folks that are outside of the system today that have a strong interest in coming in and developing new restaurants with us. Okay. And then just the last question. Just for context, would you mind sharing sort of what kind of valuations the franchisee portfolios tend to trade hands at in terms of the Applebee's franchisees? Yes. Well, there's we've seen several transactions over the years, and obviously, based on the portfolio, it varies. But I think what you'd find is we're trading right in the middle of where you're seeing other transactions. Okay. That's very helpful. Thank you. And we have our next question from Brian Vaccaro with Raymond James. Thanks. Good morning. Just a few questions on the guidance, if I could. Starting out with the comps, could you put some more context around how you arrived at the flat to up 2 range for each brand? And in light of the stronger industry trends, is it reasonable to assume that quarter to date you are above that range at each brand? Yes. Hey Brian, this is Tom. So yes, the guidance was developed thinking through kind of how we're ending up the year for 2019 and looking ahead obviously over the course of the balance of the year. I wouldn't read we do tend to have a little bit of seasonality in our quarterly results and obviously we have a different range of laps from last year. So I wouldn't read into that necessarily as where we are quarter to date. I think we can reiterate that we're very comfortable with that guidance and that while I think we believe strongly that as long as we're on game plan, which is exactly where we are, we're going to do very well. I think we're also cognizant of there's a number of factors going on in the environment and the industry that could have an impact on our businesses. Right now, it looks pretty good. But I don't have to list with you the various things going on in the world that could change that. Including elections typically don't have much of an impact on our business, but this seems like a different election. So I don't think we're being pessimistic at all about the year. We're very confident going in that we're going to run positive comp numbers. And I think we're just trying to give a sense of but let's be clear, there's a number of things out there that could impact it. Right now, it looks good, but we'll see. It looks like we're through most of the weather for the winter, so that's a good thing. It looks like a lot of the other issues that could have been impactful on our numbers are sort of settling out, but I think our guidance is reflective of all those potential considerations. All right. That's helpful. Thank you. And I believe there's an extra week in 2020. Could you quantify the benefit to EBITDA and EPS from that extra week? Hey, Brian, you're right. We do have a 53rd week for the year. So the way to think about it is from an EBITDA perspective, it could be kind of in that $5,000,000 range and for the from an EPS perspective, perhaps in the mid teens sense. Okay, great. Great. And then just one other one, Tom. The Applebee's company units, could you just shed some light on the profitability there and some of the moving pieces, puts and takes here in the Q4? Sure. So if you look so are you thinking prospectively or back in 2019? Well, just more details on the Q4. I think we count something in the low call it low, almost mid single digits on EBIT margin, but and then perspective, any view on the puts and takes that are available? Yes. So as John alluded to, we did have positive comps there, which was good in light of the overall system performance. It did outperform. For the year, it did miss EBITDA as well as on but having said that, there was a little bit offset on G and A. For 2020, I think we're finding that portfolio stabilizing with about $16,000,000 4 wall EBITDA, approximately $10,000,000 entity level EBITDA, which implies $5,000,000 $6,000,000 of above restaurant G and A. All right. That's helpful. I'll pass it along. Thank you. And I think one important consideration in how we gauge is obviously we're we like the fact that we are leading the franchise system with a number of our other newer franchisees on the top end and that we're running comparable profit margins, 4 wall to the rest of the franchisees. Thank you. Thank you. Our next question is from Jeffrey Bernstein with Barclays. Great. Thank you very much. A couple of questions. The first one is on the Applebee's comps. Some of your casual dining peers have been talking about more aggressive discounting on food and beverage, seemingly with an eye on Applebee's. And I know you mentioned that that is kind of the foundation of the brand. Just wondering what are the conversations like with the Applebee's franchisees? I know you mentioned strong alignment, but in terms of their desire and willingness to continue with these more aggressive value offers, especially if not currently driving presumably the desired traffic growth, just their willingness and acceptance of the more aggressive discounting? And then I had a follow-up. Hey, Jeffrey, this is John. Good question. We have a tight partnership with our franchisees and in particular our franchise business council. The we take into consideration incrementality when we implement our plans. And our assumption is that our content will be relevant. We will drive incrementality. It's not always a broad based target. Sometimes those are well defined narrow targets with high degrees of incrementality. It varies depending on whether it's a beverage proposition, a food proposition or a value proposition. But the assumption moving forward is that we drive incrementality and we maximize incremental profit as well as revenue. And for a number of reasons, we believe we will be very successful in doing so in 2020. And when we talk about strong alignment, I think what we can clearly count on is the franchisees as well as the Dine team and the Applebee's team now can see directly that when we innovate, bring in really strong new products, create abundant value and aggressively price point, we are going to build traffic. We've proven that ourselves last year, and we're certainly proving it to ourselves this year. And so, just for example, we're just ending an incredibly successful campaign with bowls, which were priced at $7.99 And obviously, that was well received and enthusiastically supported by our guests and by our franchisees. And so it's those types of programs on both brands that we think hang that we're hanging our success factors on. And I think when you look at it, yes, I think where we did not see a lot of competition in 'eighteen, clearly in 'nineteen, people took notice and started doing things to compete as well. So we expect a similar level of competitive environment this year, but we also are very confident that what we've got planned is going to significantly lead both categories. And Jeff, I would add, John again here that our look, we have a number of large franchise entities, and it's hard to compete with a brand of our scale if you happen to have a concept with 200, 300, 400 units. And so we welcome a market share battle. And we believe we're well positioned to win that over the long haul. Got you. And then as I think about the 2020 earnings guidance, it seemed like there was a disparity between EBITDA above consensus while EPS well below. I was just wondering if you could provide any color on a specific line item guidance perhaps between EBITDA and EPS to help us reconcile whether that's interest expense or tax or share count, any unusual that might have led to the disparity between EBITDA and EPS growth relative to expectation? That's a good question, Jeff. I don't need to cite what the difference between the two figures are, but if you really look at it, there might have been some differences on interest expense. We in our reconciliation table have further split out. For example, our debt related interest expense and other interest expenses. I think a lot of it does have to do with depreciation and amortization. So there are two factors there. 1 being, if you've noticed our CapEx cadence over the past few years has ramped up, and so you're going to have more depreciation flowing through, which will impact EPS. And then with respect to our company operated restaurants, not only do we have for this year running about $4,000,000 of CapEx attributable to that company operated business. We also have some amortization of costs based on our purchase accounting. So I think those are probably the factors that every $1,000,000 of variation on depreciation, amortization assumptions could have some significant effect on EPS. Hopefully that helps answer your question. Yes. But I think one thing to keep in mind on the depreciation front, it represents investment in futures technology programs that are going to allow us to drive additional business. So, and we have clearly ramped up our spending on technology significantly over the last 3 to 4 years and now those investments are starting to pay dividends in the restaurants, but we're going to see depreciation based on them. Both investments that we've made, franchisees are investing alongside of us as well in technology. But it's allowing us to do things like the technology around server tablets and how that's going to improve both productivity as well as sales as well as overall customer experience. We're doing things in the kitchen where we're using technology. We're also doing the cost program that John referenced. So there's a number of things that we've invested in over the last couple of years, in addition to owning some company stores, which obviously we're spending money on, some of those which has some depreciation effect. Now, in the end, as we've said, our ownership of that is not going to be long term, so that's a temporary flip. But I think you should view the depreciation as, yes, it's going to dampen earnings a little bit, but it's also investment in the future. Jeff, one final point, just giving you additional detail here out of the 40. So if you look at our 2020 reconciliation table between net income and adjusted EBITDA, we have $43,000,000 of depreciation and amortization, dollars 6,000,000 of that is from company operated. Very helpful. Thank you. Okay. And thank you. We have our next question from Brett Levi with MKM Partners. Great. Thank you. Good morning to you all If you could just follow-up a little bit on Jeff's question to start, where he was asking about the competitive landscape and how others might be more aggressive. You all have obviously succeeded on the value equation. How much more dry powder do you think you really have given that you talked about off premise is now more of a marketing as opposed to a growth and you've already had some very successful value promos? And then I've got a couple of follow ups. This is Jay. Brett, let me address from the IHOP standpoint first. We want to be relevant for our guests to give them reasons to get off their couch and come into the restaurant or to order to go, etcetera. So, about 40% of our guests are what we would consider to be in that value guest category. So it's a large amount of our guests. We are a kind of middle of America kind of brand. We're a value brand just like John said Applebee's is. So we have to be cognizant of that. We're not going to play at the highest end of the restaurant business. So we've got to make sure that we always have some type of relevant value for the guests to get them to come in more frequently. And I think the guests need to know that we have that. So we're not going to just keep discounting for the sake of discounting. Our franchisees are on board with us to have profitable traffic, And that's what we need to do with our value program. So we'll do different things over different times. There'll be food innovations. There'll be value programs. There'll be discounts. Where we are really leaning into this is not on the weekends. We do a great job on the weekends filling up our restaurants, But we have opportunities to fill up seats at the other dayparts and that's where we're going to lean heavily on our value plays. And Brett, from an Applebee's perspective, just to be very direct, we have a lot of dry powder. We do from a beverage standpoint. We do from a culinary standpoint. And marrying that right relevant message with the right demographic, within the right occasion framework, understanding the drivers for those guests is really important for us. We leverage data. We test and validate the propositions. We have ever gone wrong in the past, it's when we've lost sight of a value seeker. And so to answer your question directly, there's a lot of dry powder and our plans tend to be 12 to 18 months in advance with a lot of flexibility should the market dynamic change. Yes. So I think our expectation is the environment is going to remain very competitive like it became last year. But what we are also confident what you should be hearing from us is we believe we have got a game plan that drives traffic, that drives comp store sales growth, that brings in that value seeking guest, but at the same time we drive profitability for the franchisees, and we're very confident we can do all those things together. Great. And following up on an earlier discussion about development, can you share a little bit more on what you're thinking for 2020 in terms of the international landscape? And then also domestically, you called out the 200 IHOP remodels. What are you thinking about in terms of what still needs to be done on IHOP? And also when should we start to think about next gen on the Applebee's side? Thank you. Okay. So let's start with the renovation aspect for both brands. So at IHOP, we've had a program going for about 4 years now and we've been doing about 300 restaurants a year. We do those on an exact schedule. Franchisees will remodel the restaurants on a reschedule based on when they began their franchise agreements every so many years. So, there's a regular schedule that goes on. We've only got a couple more years left of that schedule. We'll be done with this. And we're already starting to look at what's next because we do have a regular remodel program to keep our restaurants fresh. And we've got a committee that's actually working on the next remodel as we speak. But this has become kind of autopilot for us as we're cranking out a lot of them every year and we'll be done with that program. In the next couple of years, we'll be ready to start the next program. And Brett, on the Applebee's front, we our asset portfolio is in very good shape considering we remodeled approximately 90% of the system within over the last 6 years. And if there were assets that were distressed and didn't look good from a consumer standpoint, those have been removed from the system as part of our pruning up the system. We have a new prototype that we've developed. It's value engineered. We're focused right now on kind of the stability and predictability comp sales growth. And at the right time, we'll engage our franchisees and begin the next evolution of remodeling. Yes. So on the development front, let's start with the international side. We're very bullish on the ability to grow the brands globally. We mentioned a couple of areas where we've got 150 restaurants in our pipeline and that is rapidly expanding each year. What you've seen on the other hand in the last couple of years is some churn on the existing units that were done previously. In the last two and a half to three years, our approach to franchising has become very different globally. So, we are obviously much more interested in having scale within a market and much more concerned about who we're doing business with as franchisees than we may have been in the past. And so the combination of those factors we think are going to drive significant profitable growth in those markets going forward. We think we've got a great opportunity with existing and new franchisees to continue to expand the international footprint, but in a market by market approach where we've got greater density than we may have done in the past. And so that's and you'll see us talking about that and additional resourcing bringing additional investments to the international side. On the domestic front, there's just some really exciting things going on. The idea of Applebee's returning to growth is really exciting. We like the idea of looking at new formats for both. We've obviously introduced a fast cash flow format in Flip for IHOP, but we've also looked at some similar formats and we have some we have one open on the Applebee side. So you're going to see us continue to work with individual franchisees to look at by marketplace what size unit and what approach makes sense, with the guests based on expectations. So that we think those are both going to pay big dividends. Returning Applebee's to growth will really, I think, signal the overall health of the system of the franchisees, and so excited about that. On the IHOP side, though, it is just incredible the opportunity that lies in front of us. I mean, we've already I mean, if you look at who's grown in this category over the last 10 years, it's been IHOP. And yes, there's some other folks that are new that are growing, but they're not even adding the number same number of restaurants we're adding. So our position in IHOP is good. If you look at the guidance that we're going to talk about going forward for growth of IHOP, it's going to be explosive. We are expecting big things from Flip. The interest level is strong. We're going to open the first one in, call it, April ish in Atlanta. We like that concept a lot. We're looking at some Ghost Kitchen options. We're looking at and then we're looking at this ability to grow the existing footprint as well as these non traditional opportunities where we've signed a big one, but there's a lot of other big ones out there. And when you look at the value that we bring to particularly conversion restaurants, whether they be in truck stops or other areas or looking at, for example, gaming casinos run by Native Americans, there's just significant opportunity that we haven't even begun to tap that we think is going to give us a significant expansion of the footprint of IHOP, as well as we think we're going to get to a strong expansion point for Applebee's. Our next question is from Jake Bartlett with SunTrust. Great. Thanks for taking the questions. I first had just a couple kind of quick kind of clarifications maybe call it. But on the international side with Applebee's, there was a large number of closures in the Q4. Does that represent kind of a cleaning up of that? Or I know you've given us guidance for domestic development, net development, but what about kind of how should the international play into that? I think that what you should what you saw in the Q4 was some cleaning up, but it was really one franchisee that we were struggling with that we decided we did not want to continue to do business with. And so that drove most of that result and we expect to go back into that market and replace those units that we lost. I think the way you ought to think about it is, I think we're continuing to prune the inventory, but you'll see strong growth and then eventually in the next year or 2, strong net unit growth as a result of those efforts. Got it. And then one comment that we've heard from some of your competitors are that Applebee's can't keep this level of value forever or kind of keep something like the all you can eat riblets forever. And just to kind of answering that question, could you tell us what you expect for commodity inflation in 2020? Also just how your franchisees margins are during those kind of deep value promotions? Is it value engineered in a way that you're actually maintaining margins and that you essentially can do that level of value forever? When the programs we're running, when we're driving traffic, we are increasing margin, not decreasing. That's the way the programs are designed. So we are I'll let John talk to this a little bit. We are looking at an opportunity going forward where we believe that it's a combination of abundance value as well as strong price pointing in both brands to keep and maintain our guest interest in coming into the restaurants and driving traffic. Our goal is to continue to drive positive traffic and drive comp sales in a balanced fashion with a combination of mild price increasing as well as managing our mix so that our pricing may go up, but it's not because of price increases, it's because of course we're highlighting different items on the menu. So our franchisees are profitable. We've monitored very carefully. The programs that we build when they work, they not only drive traffic, they drive profitability. And that has been a hallmark over the last several years. And that is our goal. We expect the same thing to go in 2020. We don't see any shortage of our ability to continue to drive value because when we drive value through these programs and drive people in, not all of them buy the offer that's made. We make sure we structure the offer that's made so that it is not margin deteriorating for our franchisees. And with the other business that's come, it's a positive aspect for us. We don't see any limit to what we can do. Yes. I think Steve framed it well, Jake. Look, we design these we create an architecture around these programs with our franchise partners. We don't do this in a vacuum. And then we have a myriad of ways by which we test and validate, and we believe we can do both. We believe we can drive incremental traffic and incremental profitability for our franchisees. We want them to be extraordinarily restaurants and order what may be perceived as a deeply discounted proposition and the percentage of our guests that order from a full margin balance of menu. In understanding that dynamic, we end up in a profitable place. And so we and again, we do this in partnership with our franchisees. We believe we can continue to be successful. It's important we communicate overt value when we have it. Overt value isn't always price alone. We believe price is critically important to the value seeker who has little discretionary income, but abundance and innovation also important to us. Let me Jake, this is Tom. Let me just get the commodity basket question. So 2019 was pretty favorable for both brands. Applebee's year over year was favorable by 2.6 percent. IHOP year over year was favorable by 1%. 2020, for now, we're seeing some signs of some giveback on the Applebee's. We're looking at unfavorable for 2020 by 60 basis points and IHOP unfavorable by 130 basis points. So a little bit of give and take. Applebee's between the 2 years still favorable by 2%. But keep in mind, we'll continue to take advantage of the cost improvement programs that we're running for both brands, and those offset any increases we're going to see in commodity. Jay, any thoughts? Yes, the only thing I would say from an INAP standpoint, similar to John, is that there's only a certain percentage of people that actually buy what's on your deal, what's on the discount, and it's lower than you would think. Depending on what the offer in the campaign is, that may be 10% to 20% only that actually buy that. The differences of these value seekers and people that want value, it may be the difference on whether they get off the couch or not. That could be the difference between being down 2% in traffic and up 2% in traffic if you can move a significant number of those people to come to your place instead of somebody else. So, we've got to be competitive to drive that extra traffic in. That incremental traffic is the difference a lot of time whether or not you're going to be up or down. So we're going to have relevant messages for our guests. And I think it's important too that what you're marketing outside of your building helps you drive traffic. In concert with that, you have to have a good program of what's your POP look like in the restaurant, how's your menu laid out, What are you handing people? The goal is not to trade everybody down to everybody who comes in the restaurant buys that product. There's a balancing act that comes here, but we definitely want to have traffic and we want profitable traffic for our franchisees in penny profit. And I think that's something that we've got to keep in mind is sometimes you could actually make use an example, you make a 10th or 2 less on a percentage of profit, but you drive it enough traffic, you flow more dollars to the bank and that's what the franchisees care about is having money. Hey, Jake, final point. This is John on this one. And I think it's an important point. The content, right, it's one thing to have a compelling proposition. The advertising must be compelling, and you must have the media muscle to drive incrementality, right. And I'm not sure if you look across the landscape in particular at smaller players without scale that they have the ability to do that on a consistent basis. You can engineer a proposition to be attractive for the guest. If you don't have the muscle and the effective communication to drive awareness and trial and repeat, you're going to fail in that proposition. We think Applebee's and IHOP are well positioned there. Got it. And then just real quick one other question is the advertising revenue was more than the expense in the 4th quarter. Actually, it was flipped the Q4 last year. But is that usually that's something that might kind of comes out in the wash. So should we expect that to be a drag in 2020 or is that a catch up from some prior period? No, you can expect advertising receipts to roughly equate to advertising expenses. That's our overall expectation. When you do tend to have slight timing differences on expenditures in the following year or shortly thereafter, you tend to make those up. Okay. And then in terms of the 4.25% of the contribution, we're in the kind of the last year of that. Any thoughts you can share on the likelihood that, that would continue beyond 2020? Jake, as we've stated, I'm not going to reveal anything proprietary here. We have a terrific partnership with our franchisees. And when they're making money and driving brand relevance, we tend to be aligned on things like contribution rates. So more to come on that subject. Got it. Thank you very much. Appreciate it. And we have our next question from Todd Brooks with C. L. King and Associates. Hey, good afternoon, everybody. Just a quick question on catering. Steve, I know you highlighted that as a big driver of growth for both brands. Can we talk about thoughts on pace of rollout of catering? And then across kind of 2 facets that you guys are really focused on. 1, if you can talk about marketing scale and how rolled out catering would need to be in both brands before really putting dollars behind that? And then secondly, if you could talk about the concept of taking the value that we're driving at both the nameplates in the restaurant and carrying that forward to the catering menu? Yes. So let me start in general and then we'll talk about each brand. So we obviously think catering is a big opportunity for us and we see it in 2 ways. One is we see it in a residential setting when families are getting together and they don't want or don't have the time because they're doing another event to do the cooking. We see ourselves as being perfect for that for a brunch from IHOP, which would lead to lots of options or from a very menued very many varied options from an Applebee's catering option. We are rapidly rolling them out to all the franchisees and they can talk about where we are in each brand. And we will put marketing muscle behind it because we think that this is an opportunity for us going forward off premise that will drive significant value and profitability for the franchisees, and that it has been traditionally a market that has been dominated by 1 or 2 players, and the only reason that they were dominated is because they went after it and the rest of us didn't. So we see big upside in the catering aspect. And yes, we will put marketing muscle behind it. So Jay? Yes. At IHOP, as I said in my message, we've got 900 restaurants that signed up for catering already. They're getting the operational chops down to be able to do this. This kind of goes in 2 phases. We like to get things established in the restaurants before we go spend a lot of money to market. We want to make sure we've got our processes right and we've got critical mass with our franchisees. So this is really goes in 2 phases. The first phase is really the grassroots marketing of this locally. This is having people at the restaurant level going out and building this business. You think about going to talk to administrative assistants who book these kind of things for offices, etcetera, and how do you start to build that grassroots business. That's the first wave of this. That actually helps you get the skills together to execute this and now it's time to market more broadly. And what we're looking at doing is folding catering into some overall off premise marketing to push all channels as much as we can and catering will come along with it. And I think, Todd, on the Applebee's side, 2018 was very much a kind of reintroduction of to go to America. 2019 was optimizing that and kind of the emergence of delivery. 2020 is fully leveraging both of those engines with approximately 9% to 10% being to go, 3% being delivery. And while catering is incidental, our franchisees now offer that everywhere. And I would consider 2020 a foundational year. And then 2021 a significant activation year and could it be a 5% sales layer? Without question, when you benchmark other brands who have been in this business for a long time, but it does take some time to establish a database and it does take some time to establish credibility in this arena, both of which we'll be working hard against this year. That's great. And just looping back on the value part of how you go to market with catering. Is this do you price this to capture share and reinforce the value positioning or with the convenience and the service that you're pricing, is this more of a market price type of offering for both brands? Thank you. Tom, I missed that. Are you talking broad scale or delivery? Catering. Catering. Catering. Look, average check is probably $30 in Applebee's. Catering is north of $100 You do have efficiencies from a guest consumer standpoint, and we make it easy for you. And it's far more attractive financially than ordering individual entrees. So yes, there's a value component to that clearly embedded. I think on the IHOP side, the way we're thinking about this is that I've seen this fail in other places in the past where people try to charge x amount times the number of guests you have, that's too expensive. There's got to be kind of a bulk rate that you do on this. We're not talking deep value de discounting, but there is a value to that consumer in the marketplace that you're getting a bulk price. Okay, great. Thanks. That was helpful. And thank you. We have no further questions at this time. I will now turn the call over to Steve Joyce for closing remarks. So thanks again for your time. We look forward to speaking with you again on our Q1 call scheduled for April 29. Have a good day. Thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.